File No. 811-2657
File No. 2-56969
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
---
Post-Effective Amendment No. 39
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 29
UNITED MUNICIPAL BOND FUND, INC.
- --------------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
__X__ on January 31, 1999 pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
==================================================================
DECLARATION REQUIRED BY RULE 24f-2(a)(1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the Registrant's
fiscal year ended September 30, 1998 will be filed on or about December 28,
1998.
<PAGE>
January 31, 1999
P R O S P E C T U S
UNITED
MUNICIPAL
BOND
FUND, INC.
Class A Shares
----------------------------------------------------
This Fund seeks to provide income that is
not subject to Federal income tax.
[GRAPHIC LOGO]
[GRAPHIC LOGO] THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE FUND'S SHARES, OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
COMPLETE. IT IS A CRIMINAL OFFENSE TO STATE
OTHERWISE.
<PAGE>
T A B L E O F C O N T E N T S
AN OVERVIEW OF THE FUND 3
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PERFORMANCE 4
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EXPENSES 6
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THE INVESTMENT PRINCIPLES
OF THE FUND 7
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Investment Goal and Principal
Strategies 7
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Principal Risk Considerations 8
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FINANCIAL HIGHLIGHTS 10
------------------------------------------------------
YOUR ACCOUNT 11
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Ways to Set Up Your Account 11
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Buying Shares 11
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Sales Charge Reductions and
Waivers 13
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Waivers for Certain Investors 13
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Minimum Investments 14
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Adding to Your Account 14
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Selling Shares 14
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Shareholder Services 17
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Personal Service 17
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Reports 17
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Exchanges 17
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Automatic Transactions 18
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Distributions and Taxes 18
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Distributions 18
------------------------------------------------
Taxes 19
------------------------------------------------
THE MANAGEMENT OF THE FUND 22
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Portfolio Management 22
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Management Fee 22
---------------------------------------------------
<PAGE>
An
Overview
of the
Fund
[GRAPHIC OMITTED]
Goal:
United Municipal Bond Fund, Inc. (the "Fund") seeks to provide income not
subject to Federal income tax.
Strategy:
The Fund seeks to achieve its goal by investing in a diversified portfolio of
primarily tax-exempt municipal bonds. "Municipal bonds" mean obligations the
interest on which is not includable in gross income for Federal income tax
purposes. The Fund diversifies its holdings among two main types of municipal
bonds:
o general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
o revenue bonds, which are payable only from specific sources, such as the
revenue from a particular facility or a special tax. Revenue bonds include
industrial development bonds ("IDBs"), which finance privately operated
facilities.
The Fund may concentrate its investments in IDBs for generating plants. For the
most part, the Fund buys only investment-grade municipal bonds.
Principal Risks of Investing in the Fund:
Because the Fund primarily owns fixed income securities issued by municipal
authorities, a variety of factors can affect its investment performance, such
as:
o changes in interest rates
o changes in the maturities of bonds owned by the Fund
o the credit quality of the issuers whose securities the Fund owns or of the
private companies involved in revenue bond-financed projects
o the local economic, political or regulatory environment affecting bonds owned
by the Fund
o failure of a bond's interest to qualify as tax-exempt
o municipal bond market conditions, generally
o general economic news
3
<PAGE>
Performance
[GRAPHIC OMITTED]
o the skill of Waddell & Reed Investment Management Company ("WRIMCO") in
evaluating and managing the interest rate and credit risks of the Fund's
portfolio
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.
Who May Want to Invest:
The Fund is designed for investors seeking current income that is primarily
free from Federal income tax through a highly diversified, actively managed
portfolio. You should consider whether the Fund fits with your particular
investment objectives.
The chart and table below show the past performance of the Fund's Class A
shares:
o The chart presents the annual returns and shows how performance has varied
from year to year for the past ten years.
o The table shows Class A average annual returns and compares them to the
market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on
the Fund's fiscal year.
4
<PAGE>
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
[GRAPHIC OMITTED]
1989 11.23%
1990 5.63%
1991 13.15%
1992 9.53%
1993 14.30%
1994 -7.14%
1995 20.17%
1996 4.12%
1997 10.23%
1998
In the period shown in the chart, the highest quarterly return was 8.87% (the
first quarter of 1995) and the lowest quarterly return was -6.48% (the first
quarter of 1994).
The chart does not reflect any sales charge that you may be required to pay
upon purchase of the Fund's Class A shares. If the sales charge was included,
the returns would be less than those shown.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Class A Shares of the Fund % % %
-----------------------------------------------------------------
Lehman Brothers
Municipal Bond Index
-----------------------------------------------------------------
Lipper General
Municipal Bond Fund
Universe Average
-----------------------------------------------------------------
</TABLE>
The indexes shown are broad-based, securities market indexes that are
unmanaged. The Lipper average is a composite of mutual funds with a goal
similar to that of the Fund.
5
<PAGE>
Expenses
[GRAPHIC OMITTED]
The following table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund:
<TABLE>
<CAPTION>
----------------------------------------------------
Shareholder fees
(fees deducted directly from your investment)
----------------------------------------------------
<S> <C>
Maximum sales charge (load) on purchases
(as a percentage of offering price) 4.25%
----------------------------------------------------
Maximum sales charge (load) on
reinvested dividends None
----------------------------------------------------
Deferred sales charge (load) None
----------------------------------------------------
Redemption fees None
----------------------------------------------------
Exchange fee None
----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Annual Fund Operating Expenses
(expenses deducted from Fund assets,
as a percentage of average net assets).
<S> <C>
----------------------------------------------------
Management fees 0.42%
----------------------------------------------------
Distribution and Service (12b-1) fees(1) 0.19%
----------------------------------------------------
Other expenses 0.10%
----------------------------------------------------
Total Fund operating expenses 0.71%
----------------------------------------------------
</TABLE>
(1)It is possible that long-term shareholders of the Fund may bear 12b-1
distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Example:
- --------------------------------------------------------------------------------
<S> <C>
This example is intended to help you compare the cost of investing in the
Class A shares of the Fund with the cost of investing in other mutual funds.
The example assumes that (a) you invest $10,000 in the Fund for each time
period specified, (b) your investment has a 5%(2) return each year, and
(c) the Class A expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
- --------------------------------------------------------------------------------
1 year $ 494
- --------------------------------------------------------------------------------
3 years $ 642
- --------------------------------------------------------------------------------
5 years $ 803
- --------------------------------------------------------------------------------
10 years $1,270
- --------------------------------------------------------------------------------
</TABLE>
(2) Use of an assumed annual return of 5% is for illustration purpose only and
is not a representation of the Fund's future performance, which may be greater
or lesser.
Your costs would be the same whether or not you redeemed your shares at the end
of each time period. For a more complete discussion of certain expenses and
fees, see "Management Fee."
6
<PAGE>
The
Investment
Principles
of the Fund
[GRAPHIC OMITTED]
Investment Goal and Principal Strategies
The goal of the Fund is to provide income that is not subject to Federal income
tax. The Fund seeks to achieve this goal by investing principally in municipal
bonds. There is no guarantee that the Fund will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest on
which is not includable in gross income for Federal income tax purposes. The
Fund anticipates that not more than 40% of the dividends it will pay to
shareholders will be treated as a tax preference item for alternative minimum
tax ("AMT") purposes. The Fund and WRIMCO rely on the opinion of bond counsel
for the issuer in determining whether obligations are municipal bonds.
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes.
The two main types of municipal bonds are general obligation bonds and revenue
bonds. For general obligation bonds, the issuer has pledged its full faith,
credit and taxing power for the payment of principal and interest. Revenue
bonds are payable only from specific sources; these may include revenues from a
particular facility or class of facilities or a special tax or other revenue
source. Industrial development bonds are revenue bonds issued by or on behalf
of public authorities to obtain funds to finance privately operated facilities.
Other municipal obligations include lease obligations of municipal authorities
or entities and participations in these obligations.
At least 80% of the Fund's net assets will be invested during normal market
conditions in municipal bonds. More than 25% of the Fund's assets may consist
of industrial development bonds the interest on which is paid by revenues from
generating plants.
However, the Fund may not purchase any municipal bonds that are not either:
o rated at least BBB by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), or Baa by Moody's Investors Service, Inc. ("MIS");
or
o if unrated, are determined by WRIMCO to be of comparable quality, unless
thereafter at least 80% of the
7
<PAGE>
value of the Fund's total assets would consist of cash or municipal bonds
that were of such quality at the time of purchase.
The Fund may invest up to 10% of its assets in taxable obligations. These must
be either:
o U.S. Government securities;
o obligations of domestic banks and certain savings and loan associations;
o commercial paper rated at least A by S&P or MIS; or
o any of the foregoing obligations subject to repurchase agreements.
Income from taxable obligations, repurchase agreements and derivative
instruments will be subject to Federal income tax.
Sometimes WRIMCO may believe that a full or partial defensive position is
desirable temporarily due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal bonds. To
achieve a temporary defensive posture, WRIMCO may take any one or more of the
following steps:
o shorten the average maturity of the Fund's portfolio;
o hold taxable obligations; and
o emphasize debt securities of a higher quality than those the Fund would
ordinarily hold. A defensive posture might reduce the Fund's yield. As an
alternative to taking a temporary defensive position or in order to more
quickly participate in market or economic conditions, the Fund may buy or sell
futures contracts.
The Fund may also invest in other types of investments and use certain other
instruments in seeking to achieve the Fund's goal. For example, the Fund may
invest in options, asset-backed securities and other derivative instruments if
it is permitted to invest in the type of asset by which the return on, or value
of, the derivative is measured.
Principal Risk Considerations
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk. Market risk is the possibility of a
change in the price of the security because of market factors. Because of
market risk, the share price of the Fund will likely change as well. Financial
risk is based on the financial situation of the issuer of the security. The
financial risk of the Fund depends on the credit quality of the securities in
which it is invested. Prepayment
8
<PAGE>
risk is the possibility that, during periods of falling interest rates, a debt
security with a high stated interest rate will be prepaid before its expected
maturity date.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of the Fund's investments and the
income it generates will vary from day to day, generally due to changes in
interest rates, market conditions, and other company and economic news.
Performance will also depend on WRIMCO's skill in selecting investments. For
IDBs, credit quality is generally dependent on the credit standing of the
company involved. To the extent that the Fund invests in municipal bonds the
payment of principal and interest on which is derived from revenue of similar
projects, or in municipal bonds of issuers located in the same geographic area,
the Fund may be more susceptible to the risks associated with economic,
political or regulatory occurrences that might adversely affect particular
projects or areas. See the SAI for examples of the types of projects in which
the Fund may invest from time to time and for a discussion of the risks
associated with such projects.
See the SAI also for more information about the Fund's permitted investments
and strategies, as well as the restrictions that apply to them.
9
<PAGE>
Financial Highlights
[GRAPHIC OMITTED]
The following information is to help you understand the financial performance of
the Fund's Class A* shares for the fiscal periods shown. "Total return" shows
how much your investment would have increased (or decreased) during each period,
assuming reinvestment of all dividends and distributions. This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the SAI, which is available upon request.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
Per-share Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 7.47 $ 7.32 $ 7.25 $ 6.91 $ 7.83
--------------------------------------------------------------------------------
Income from investment operations:
Net investment
income 0.37 0.38 0.39 0.39 0.38
Net realized and
unrealized gain (loss)
on investments 0.25 0.30 0.12 0.38 (0.67)
--------------------------------------------------------------------------------
Total from investment
operations 0.62 0.68 0.51 0.77 (0.29)
--------------------------------------------------------------------------------
Less distributions:
From net
investment income (0.37) (0.37) (0.39) (0.39) (0.38)
From capital gains (0.09) (0.16) (0.05) (0.00) (0.25)
In excess of capital
gains (0.00) (0.00) (0.00) (0.04) (0.00)
--------------------------------------------------------------------------------
Total distributions (0.46) (0.53) (0.44) (0.43) (0.63)
--------------------------------------------------------------------------------
Net asset value, end
of period $ 7.63 $ 7.47 $ 7.32 $ 7.25 $ 6.91
--------------------------------------------------------------------------------
Total return** 8.67% 9.77% 7.16% 11.51% (3.91)%
Ratios/Supplemental Data
Net assets, end of
period (in millions) $ 997 $ 994 $ 997 $ 975 $ 951
Ratio of expenses to
average net assets 0.72% 0.67% 0.68% 0.65% 0.64%
Ratio of net
investment income
to average net assets 4.95% 5.14% 5.23% 5.51% 5.17%
Portfolio turnover
rate 50.65% 47.24% 74.97% 70.67% 62.61%
--------------------------------------------------------------------------------
</TABLE>
*On January 21, 1996, Fund shares outstanding were designated Class A shares.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
Note: During the fiscal periods ended September 30, 1998, 1997, 1996, 1995 and
1994, 77.46%, 67.70%, 84.75%, 88.99% and 58.94%, respectively, of the dividends
paid were exempt from Federal income tax.
10
<PAGE>
Your Account
[GRAPHIC OMITTED]
The different ways to set up (register) your account are
listed below.
Ways to Set Up Your Account
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might
have.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a Class A share (price to buy one Class A share) is the
Fund's Class A net asset value ("NAV") plus the sales charge shown in the table
below.
11
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Sales Charge Sales Charge as
as Percent of Approx. Percent of
Size of Purchase Offering Price Amount Invested
- ------------------------------------------------------------------------
<S> <C> <C>
Under $100,000 4.25% 4.44%
- ------------------------------------------------------------------------
$100,000 to less than
$300,000 3.25 3.36
- ------------------------------------------------------------------------
$300,000 to less than
$500,000 2.50 2.56
- ------------------------------------------------------------------------
$500,000 to less than
$1,000,000 1.75 1.78
- ------------------------------------------------------------------------
$1,000,000 to less than
$2,000,000 1.00 1.01
- ------------------------------------------------------------------------
$2,000,000 and over 0.00 0.00
- ------------------------------------------------------------------------
</TABLE>
The Fund's Class A NAV is the value of a single share.
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the later of
the close of business of the NYSE, normally 4 p.m. Eastern time, or the close
of the regular session of any other securities or commodities exchange on which
an option or futures contract held by the Fund is traded.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
12
<PAGE>
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o combining additional purchases of Class A shares of any of the funds in the
United Group, except United Cash Management, Inc., with the NAV of Class A
shares already held ("rights of accumulation")
o grouping all purchases of Class A shares made during a thirteen-month period
("Statement of Intention"). Class A shares of another fund purchased through a
contractual plan may not be included unless the plan has been completed.
o grouping purchases by certain related persons. Additional information and
applicable forms are available from Waddell & Reed financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o the Directors and officers of the Fund, employees of Waddell & Reed, Inc.,
employees of their affiliates, financial advisors of Waddell & Reed, Inc. and
the spouse, children, parents, children's spouses and spouse's parents of
each.
o purchases of Class A shares in certain retirement plans and certain trusts for
these persons.
o purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees. Shares may also be issued at NAV in a merger, acquisition
or exchange offer made pursuant to a plan of reorganization to which the Fund
is a party.
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the Plan, the Fund may
pay Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the
average daily net assets of the Class A shares. This fee is to reimburse
Waddell &
13
<PAGE>
Reed, Inc. for the amounts it spends for distributing the Fund's Class A
shares, providing services to Class A shareholders or maintaining Class A
shareholder accounts. Because the Plan fees are paid out of the Class A assets
on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Minimum Investments
<TABLE>
<S> <C>
- --------------------------------------------------------
To Open an Account $500
- --------------------------------------------------------
For certain exchanges $100
- --------------------------------------------------------
For certain accounts opened with Automatic
Investment Service $ 50
- --------------------------------------------------------
To Add to an Account
- --------------------------------------------------------
For certain exchanges $100
- --------------------------------------------------------
For Automatic Investment Service $ 25
- --------------------------------------------------------
</TABLE>
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail
the check along with:
o the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
o a letter stating your account number, the account registration and that you
wish to purchase Class A shares of the Fund.
Mail to Waddell & Reed, Inc. at the address printed on your confirmation or
year-to-date statement.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one Class A share) is the Fund's Class A
NAV.
To sell shares, your request must be made in writing.
Complete an Account Service Request form, available from your Waddell & Reed
financial advisor, or write a letter of instruction with:
14
<PAGE>
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
Special Requirements for Selling Shares
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Account Type Special Requirements
- ---------------------------------------------------------------------------------
<S> <C>
The written instructions must be signed by all
Individual or Joint persons required to sign for transactions, exactly as
Tenant their names appear on the account.
- ---------------------------------------------------------------------------------
The written instructions must be signed by the
Sole Proprietorship individual owner of the business.
- ---------------------------------------------------------------------------------
The custodian must sign the written instructions
UGMA, UTMA indicating capacity as custodian.
- ---------------------------------------------------------------------------------
The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's name is
Trust not in the account registration, provide a currently
certified copy of the trust document.
- ---------------------------------------------------------------------------------
At least one person authorized by corporate
Business or Organization resolution to act on the account must sign the
written instructions.
- ---------------------------------------------------------------------------------
The written instructions must be signed by the
Conservator, Guardian person properly authorized by court order to act in
or Other Fiduciary the particular fiduciary capacity.
- ---------------------------------------------------------------------------------
</TABLE>
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after receipt of a written request for redemption in good order
by Waddell & Reed, Inc. at its home office. Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you hold a certificate, it must be properly endorsed and sent to the Fund.
15
<PAGE>
o If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that the
check has cleared and been honored. If not, payment of the redemption proceeds
on these shares will be delayed until the earlier of 10 days or the date the
Fund can verify that your purchase check has cleared and been honored.
o Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
The Fund may require a signature guarantee in certain situations such as:
o a redemption request is made by a corporation, partnership or fiduciary;
o a redemption request is made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement protects you and Waddell & Reed from fraud. You can obtain a
signature guarantee from most banks and securities dealers, but not from a
notary public.
The Fund reserves the right to redeem at NAV all shares of the Fund owned by
you having an aggregate NAV of less than $500. The Fund will give you notice
and a 60-day opportunity to purchase a sufficient number of additional shares
to bring the aggregate NAV of your shares to $500.
You may reinvest, without charge, all or part of the amount you redeemed by
sending to the Fund the amount you want to reinvest. The reinvested amounts
must be received by the Fund within thirty days after the date of your
redemption. You may do this only once with Class A shares of the Fund.
16
<PAGE>
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Services staff is
available to answer your questions or update your account records. At almost
any time of the day or night, you may access TeleWaddell from a touch-tone
phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases made
through Automatic Investment Service, and after every exchange, transfer or
redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one
account with the Fund. Call the telephone number listed above for Customer
Service if you need copies of annual or semiannual reports or account
information.
Exchanges
You may sell your Class A shares and buy Class A shares of other funds in the
United Group.
You may exchange any Class A shares of the Fund that you have held for at least
six months and any Class A shares of the Fund acquired as payment of a dividend
or distribution for Class A shares of any other fund in the United Group. You
may exchange any Class A shares of the Fund that you have held for less than
six months only for Class A shares of United Government Securities Fund, Inc.
or United Municipal High Income Fund, Inc.
17
<PAGE>
You may exchange only into funds that are legally permitted for sale in your
state of residence. Note that exchanges out of the Fund may have tax
consequences for you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
automatically. While Regular Investment Plans do not guarantee a profit and
will not protect you against loss in a declining market, they can be an
excellent way to invest for retirement, a home, educational expenses and other
long-term financial goals.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Regular Investment Plans
- --------------------------------------------------------------------
<S> <C>
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
- --------------------------------------------------------------------
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the
same or a different account
Minimum Frequency
$100 Monthly
- --------------------------------------------------------------------
</TABLE>
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year.
Usually the Fund distributes net investment income monthly. Net capital gains
usually are distributed in December.
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividends, capital gains and other distributions
will be automatically paid in additional
18
<PAGE>
Class A shares of the Fund. If you do not indicate a choice on your
application, you will be assigned this option.
2. Income-Earned Option. Your capital gains and other distributions will be
automatically paid in Class A shares, but you will be sent a check for each
dividend distribution.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions.
Taxes
As with any investment, you should consider how your investment in the Fund
will be taxed. You should be aware of the following tax implications:
Taxes on distributions. The distributions by the Fund that are designated by it
as exempt-interest dividends generally may be excluded by you from your gross
income. Dividends from the Fund's investment company taxable income generally
are taxable to you as ordinary income, whether received in cash or paid in
additional Fund shares. Distributions of the Fund's net capital gains, when
designated as such, are taxable to you as long-term capital gains, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund)
generally are taxed at a maximum rate of 20%. None of the dividends paid by the
Fund is expected to be eligible for the dividends-received deduction allowed to
corporations.
The Fund notifies you after year-end as to the amounts of dividends and other
distributions paid (or deemed paid) to you for that year.
Exempt-interest dividends paid by the Fund may be subject to income taxation
under state and local tax laws. In addition, a portion of those dividends is
expected to be attributable to interest on certain bonds that must be treated
by you as a "tax preference item" for purposes of calculating your liability,
if any, for the AMT; the Fund anticipates such portion will be not more than
40% of the dividends it will pay to its shareholders. The Fund will provide you
with information concerning the amount of distributions that must be treated as
a tax preference item after the end of each calendar year. Shareholders who may
be subject to the AMT should consult with their tax advisers concerning
investment in the Fund.
19
<PAGE>
Entities or other persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by private activity bonds ("PABs")
should consult their tax advisers before purchasing Fund shares because, for
users of certain of these facilities, the interest on PABs is not exempt from
Federal income tax. For these purposes, the term "substantial user" is defined
generally to include a "non-exempt person" who regularly uses in trade or
business a part of a facility financed from the proceeds of PABs.
Withholding. The Fund is required to withhold 31% of all taxable dividends,
capital gains distributions and redemption proceeds payable to individuals and
certain other noncorporate shareholders who do not furnish the Fund with a
correct taxpayer identification number. Withholding at that rate from taxable
dividends and capital gains distributions also is required for such
shareholders who otherwise are subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). If you have a gain on a redemption of Fund shares, the
entire gain will be taxable even though a portion of the gain may represent
municipal bond interest earned by the Fund but not yet paid out as a dividend.
If the redemption is not made until after record date, however, that interest
will be received by you as a dividend that is tax-exempt rather than as part of
a taxable gain. Ordinarily, record date is the first Friday after the 9th day
of each month.
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. However, special rules apply when
you dispose of Fund shares through a redemption or exchange within ninety days
after your purchase thereof and subsequently reacquire Fund shares or acquire
shares of another fund in the United Group without paying a sales charge due to
the thirty-day reinvestment privilege or exchange privilege. See "Your
Account." In these cases, any gain on the disposition of the original Fund
shares would be increased, or loss decreased, by the amount of the sales charge
you paid when those shares were acquired, and that amount will increase the
adjusted basis of the shares subsequently acquired. In addition, if you
purchase Fund shares within thirty days before or after redeeming other Fund
shares (regardless of class) at a
20
<PAGE>
loss, part or all of that loss will not be deductible and will increase the
basis of the newly purchased shares.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Fund will not be deductible for Federal income tax purposes to the extent
the Fund's distributions consist of exempt-interest dividends. Proposals may be
introduced before Congress for the purpose of restricting or eliminating the
Federal income tax exemption for interest on municipal bonds. If such a
proposal were enacted, the availability of municipal bonds for investment by
the Fund and the value of its portfolio would be affected. In that event, the
Fund may decide to reevaluate its investment goal and policies.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for more information. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
21
<PAGE>
The
Management
of the Fund
[GRAPHIC OMITTED]
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors have served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to Target/United Funds,
Inc. since that fund's inception, until January 8, 1992, when it assigned its
duties as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992, and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
John M. Holliday is primarily responsible for the management of the portfolio
of the Fund. Mr. Holliday has held his Fund responsibilities since May 23,
1980. He is Senior Vice President of WRIMCO, Vice President of the Fund and
Vice President of other investment companies for which WRIMCO serves as
investment manager. From July 1986 to March 1998, Mr. Holliday was Senior Vice
President of Waddell & Reed Asset Management Company, a former affiliate of
WRIMCO. Mr. Holliday has served as the portfolio manager for investment
companies managed by Waddell & Reed, Inc. and its successor, WRIMCO, since
August 1979, and has been an employee of Waddell & Reed, Inc. and its
successor, WRIMCO, since April 1978.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas
66201-9217.
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are
22
<PAGE>
neither billed directly to shareholders nor deducted from shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained below.
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily. The specific fee is
computed on the Fund's net asset value as of the close of business each day at
the annual rate of .03 of 1% of its net assets. The group fee is a pro rata
participation based on the relative net asset size of the Fund in the group fee
computed each day on the combined net asset values of all the funds in the
United Group at the annual rates shown in the following table:
<TABLE>
<CAPTION>
- ------------------------------------------------------
Group Fee Rate
Group Net Asset Level Annual Group Fee Rate
(all dollars in millions) For Each Level
- ------------------------------------------------------
<S> <C>
From $0 to $750 .51 of 1%
- ------------------------------------------------------
From $750 to $1,500 .49 of 1%
- ------------------------------------------------------
From $1,500 to $2,250 .47 of 1%
- ------------------------------------------------------
From $2,250 to $3,000 .45 of 1%
- ------------------------------------------------------
From $3,000 to $3,750 .43 of 1%
- ------------------------------------------------------
From $3,750 to $7,500 .40 of 1%
- ------------------------------------------------------
From $7,500 to $12,000 .38 of 1%
- ------------------------------------------------------
Over $12,000 .36 of 1%
- ------------------------------------------------------
</TABLE>
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United Group were
approximately $18.9 billion as of September 30, 1998. Management fees for the
fiscal year ended September 30, 1998 were 0.42% of the Fund's average net
assets.
23
<PAGE>
United
Municipal
Bond
Fund,
Inc.
[GRAPHIC OMITTED]
Custodian
UMB Bank, n.a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts
Avenue, N. W.
Washington, D. C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri 64106-2232
Investment Manager
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
Shareholder Servicing Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
24
<PAGE>
[GRAPHIC OMITTED]
UNITED
MUNICIPAL
BOND FUND, INC.
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated January 31, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information about
the Fund unless you read both the Prospectus and the SAI. The current SAI is
on file with the Securities and Exchange Commission (SEC) and it is
incorporated into this Prospectus by reference (that is, the SAI is legally
part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by the
report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the
Fund or Waddell & Reed, Inc. at the address and telephone number below.
Information about the Fund (including its current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and from the SEC's Public Reference Room in Washington, D.C.
You can find out about the operation of the Public Reference Room and
applicable copying charges by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-2657.
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED] Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465
printed on recycled paper NUP2008(1-99)
<PAGE>
The Securities and Exchange Commission has not approved or disapproved the
Fund's shares, or determined whether this Prospectus is accurate or complete. It
is a criminal offense to state otherwise.
United Municipal Bond Fund, Inc.
Class Y Shares
This Fund seeks to provide income that is not subject to Federal income tax.
Prospectus
January 31, 1999
<PAGE>
Table of Contents
<TABLE>
<S> <C>
An Overview of the Fund......................................................3
Performance..................................................................5
Expenses.....................................................................7
The Investment Principles of the Fund........................................9
Financial Highlights.........................................................10
Your Account.................................................................11
Buying Shares..............................................................11
Minimum Investments........................................................13
Adding to Your Account.....................................................13
Selling Shares.............................................................14
Telephone Transactions.....................................................16
Shareholder Services.......................................................16
Personal Service.........................................................16
Reports..................................................................17
Exchanges................................................................17
Distributions and Taxes....................................................17
Distributions............................................................17
Taxes....................................................................18
The Management of the Fund...................................................21
Portfolio Management.......................................................21
Management Fee.............................................................21
<PAGE>
An Overview of the Fund
Goal: United Municipal Bond Fund, Inc. (the "Fund") seeks to provide income not
subject to Federal income tax.
Strategy: The Fund seeks to achieve its goal by investing in a diversified
portfolio of primarily tax-exempt municipal bonds.
"Municipal bonds" mean obligations the interest on which is not includable in
gross income for Federal income tax purposes. The Fund diversifies its holdings
among two main types of municipal bonds:
o general obligation bonds, which are backed by the full faith, credit
and taxing power of the governmental authority, and
o revenue bonds, which are payable only from specific sources, such as
the revenue from a particular facility or a special tax. Revenue bonds
include industrial development bonds ("IDBs"), which finance privately
operated facilities.
The Fund may concentrate its investments in IDBs for generating plants. For the
most part, the Fund buys only investment-grade municipal bonds.
Principal Risks of Investing in the Fund:
Because the Fund primarily owns fixed income securities issued by municipal
authorities, a variety of factors can affect its investment performance, such
as:
o changes in interest rates
o changes in the maturities of bonds owned by the Fund
o the credit quality of the issuers whose securities the Fund owns or of
the private companies involved in revenue bond-financed projects
o the local economic, political or regulatory environment affecting bonds
owned by the Fund
o failure of a bond's interest to qualify as tax-exempt
o municipal bond market conditions, generally
o general economic news
o the skill of Waddell & Reed Investment Management Company ("WRIMCO") in
evaluating and managing the interest rate and credit risks of the
Fund's portfolio
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.
3
<PAGE>
Who May Want to Invest: The Fund is designed for investors seeking current
income that is primarily free from Federal income tax through a highly
diversified, actively managed portfolio. You should consider whether the Fund
fits with your particular investment objectives.
4
<PAGE>
Performance
The chart and table below show the past performance of the Fund's Class A
shares. Class A performance is given because there were no Class Y shares
outstanding at September 30, 1998.
o The chart presents the Class A annual returns and shows how performance has
varied from year to year for the past ten years.
o The table shows Class A average annual returns and compares them to the
market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Fund's shareholder
reports is based on the Fund's fiscal year.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1998 %
1997 10.23
1996 4.12
1995 20.17
1994 -7.14
1993 14.30
1992 9.53
1991 13.15
1990 5.63
1989 11.23
In the period shown in the chart, the highest quarterly return was 8.87%
(the first quarter of 1995) and the lowest quarterly return was -6.48%
(the first quarter of 1994).
The chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge were
included, the returns would be less than those shown.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year 5 Years 10 Years
------ ------- --------
Class A Shares of the Fund
Lehman Brothers Municipal Bond Index
Lipper General Municipal Bond Fund Universe Average
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Lipper average is a composite of mutual funds with goals similar to that of
the Fund.
5
<PAGE>
Expenses
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund:
Shareholder fees (fees deducted directly from your investment).
Maximum sales charge (load)
on purchases None
Maximum sales charge (load)
on reinvested
dividends None
Deferred
sales charge (load) None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (expenses deducted from Fund assets, as a
percentage of average net assets).(1)
Management fees 0.42%
Distribution and
Service (12b-1) fees None
Other expenses 0.18%
Total Fund operating
expenses 0.60%
Example: This example is intended to help you compare the cost of investing in
the Class Y shares of the Fund with the cost of investing in other mutual funds.
The example assumes that (a) you invest $10,000 in the Fund for each time period
specified, (b) your investment has a 5% (2) return each year, and (c) the Class
Y expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
1 year $494
3 years $642
- -----------
(1)Expense ratios are based on the management fees and other Fund-level
expenses of the Fund for the fiscal year ended September 30, 1998, and the
expenses attributable to the Class Y shares that are anticipated for the
current year. Actual expenses may be greater or lesser than those shown.
(2)Use of an assumed annual return of 5% is for illustration purposes only and
is not a representation of the Fund's future performance, which may be
greater or lesser.
7
<PAGE>
Your costs would be the same whether or not you redeemed your shares at
the end of each time period. For a more complete discussion of certain expenses
and fees, see "Management Fee."
8
<PAGE>
About the Investment Principles of the Fund
[GRAPHIC OMITTED]
Investment Goal and Principal Strategies
The goal of the Fund is to provide income that is not subject to Federal income
tax. The Fund seeks to achieve this goal by investing principally in municipal
bonds. There is no guarantee that the Fund will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest on
which is not includable in gross income for Federal income tax purposes. The
Fund anticipates that not more than 40% of the dividends it will pay to
shareholders will be treated as a tax preference item for alternative minimum
tax ("AMT") purposes. The Fund and WRIMCO rely on the opinion of bond counsel
for the issuer in determining whether obligations are municipal bonds.
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes.
The two main types of municipal bonds are general obligation bonds and revenue
bonds. For general obligation bonds, the issuer has pledged its full faith,
credit and taxing power for the payment of principal and interest. Revenue
bonds are payable only from specific sources; these may include revenues from a
particular facility or class of facilities or a special tax or other revenue
source. Industrial development bonds are revenue bonds issued by or on behalf
of public authorities to obtain funds to finance privately operated facilities.
Other municipal obligations include lease obligations of municipal authorities
or entities and participations in these obligations.
At least 80% of the Fund's net assets will be invested during normal market
conditions in municipal bonds. More than 25% of the Fund's assets may consist
of industrial development bonds the interest on which is paid by revenues from
generating plants.
However, the Fund may not purchase any municipal bonds that are not either:
o rated at least BBB by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), or Baa by Moody's Investors Service, Inc. ("MIS");
or
o if unrated, are determined by WRIMCO to be of comparable quality, unless
thereafter at least 80% of the
<PAGE>
value of the Fund's total assets would consist of cash or municipal bonds
that were of such quality at the time of purchase.
The Fund may invest up to 10% of its assets in taxable obligations. These must
be either:
o U.S. Government securities;
o obligations of domestic banks and certain savings and loan associations;
o commercial paper rated at least A by S&P or MIS; or
o any of the foregoing obligations subject to repurchase agreements.
Income from taxable obligations, repurchase agreements and derivative
instruments will be subject to Federal income tax.
Sometimes WRIMCO may believe that a full or partial defensive position is
desirable temporarily due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal bonds. To
achieve a temporary defensive posture, WRIMCO may take any one or more of the
following steps:
o shorten the average maturity of the Fund's portfolio;
o hold taxable obligations; and
o emphasize debt securities of a higher quality than those the Fund would
ordinarily hold. A defensive posture might reduce the Fund's yield. As an
alternative to taking a temporary defensive position or in order to more
quickly participate in market or economic conditions, the Fund may buy or
sell futures contracts.
The Fund may also invest in other types of investments and use certain other
instruments in seeking to achieve the Fund's goal. For example, the Fund may
invest in options, asset-backed securities and other derivative instruments if
it is permitted to invest in the type of asset by which the return on, or value
of, the derivative is measured.
Principal Risk Considerations
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk. Market risk is the possibility of a
change in the price of the security because of market factors. Because of
market risk, the share price of the Fund will likely change as well. Financial
risk is based on the financial situation of the issuer of the security. The
financial risk of the Fund depends on the credit quality of the securities in
which it is invested. Prepayment
<PAGE>
risk is the possibility that, during periods of falling interest rates, a debt
security with a high stated interest rate will be prepaid before its expected
maturity date.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of the Fund's investments and the
income it generates will vary from day to day, generally due to changes in
interest rates, market conditions, and other company and economic news.
Performance will also depend on WRIMCO's skill in selecting investments. For
IDBs, credit quality is generally dependent on the credit standing of the
company involved. To the extent that the Fund invests in municipal bonds the
payment of principal and interest on which is derived from revenue of similar
projects, or in municipal bonds of issuers located in the same geographic area,
the Fund may be more susceptible to the risks associated with economic,
political or regulatory occurrences that might adversely affect particular
projects or areas. See the SAI for examples of the types of projects in which
the Fund may invest from time to time and for a discussion of the risks
associated with such projects.
See the SAI also for more information about the Fund's permitted investments
and strategies, as well as the restrictions that apply to them.
9
<PAGE>
Financial Highlights
Financial Highlights for Class Y shares are not included because the Fund had no
Class Y shares outstanding during the fiscal year ended September 30, 1998.
10
<PAGE>
Your Account
Class Y shares are designed for institutional investors or others
investing through certain intermediaries. Class Y shares are available for
purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has 100
or more eligible employees and holds the shares in an omnibus account on the
Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an omnibus
account on the Fund's records;
o government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
o certain retirement plans and trusts for employees and account
representatives of Waddell & Reed, Inc. and its affiliates.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its
financial advisors. To open your account you must complete and sign an
application. Your Waddell & Reed financial advisor can help you with any
questions you might have.
The price to buy a share of the Fund, called the offering price, is
calculated every business day.
The offering price of a Class Y share (price to buy one Class Y share) is
the Fund's Class Y net asset value ("NAV"). The Fund's Class Y shares are sold
without a sales charge.
To purchase by wire, you must first obtain an account number by calling
1-800-366-5465, then mail a completed application to Waddell & Reed, Inc., P. O.
Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to 913-236-5044.
Instruct your bank to wire the amount you wish to invest to UMB Bank, n.a., ABA
Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and
Account Number.
11
<PAGE>
To purchase by check, make your check payable to Waddell & Reed, Inc. Mail
the check, along with your completed application, to Waddell & Reed, Inc., P.O.
Box 29217, Shawnee Mission, Kansas 66201-9217.
You may also buy shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements to buy shares.
The Fund's Class Y NAV is the value of a single share.
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the
"NYSE") is open. The Fund normally calculates the NAVs of its shares as of the
later of the close of business of the NYSE, normally 4 p.m. Eastern time, or the
close of the regular session of any other securities or commodities exchange on
which an option or futures contract held by the Fund is traded.
When you place an order to buy shares, your order will be processed at the
next offering price calculated after your order is received and accepted. Note
the following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
o The Fund does not issue certificates representing Class Y shares of the Fund.
o If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, the Fund will be
12
<PAGE>
deemed to have received your purchase order when that third party (or its
designee) has received your order. Your order will receive the offering price
next calculated after the order has been received in proper form by the
authorized third party (or its designee). You should consult that firm to
determine the time by which it must receive your order for you to purchase
Fund shares at that day's price.
When you sign your account application, you will be asked to certify that
your Social Security or other taxpayer identification number is correct and
whether you are subject to backup withholding for failing to report income to
the Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
To Open an Account
For a government entity or authority or for a corporation: $10 million
(within
first
twelve
months)
For other
investors: Any amount
Adding to Your Account
You can make additional investments of any amount at any time.
To add to your account by wire: Instruct your bank to wire the amount you
wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer
Name and Account Number.
To add to your account by mail: Make your check payable to Waddell & Reed,
Inc. Mail the check along with a letter stating your account number, the account
registration and that you wish to purchase Class Y shares of the Fund to:
Waddell & Reed, Inc.
13
<PAGE>
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
Selling Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares.
The redemption price (price to sell one Class Y share) is the Fund's Class
Y NAV.
To sell shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 1-800-366-5465 or fax your
request to 913-236-5044 and give your instructions to redeem shares and make
payment by wire to your pre-designated bank account or by check to you at the
address on the account.
To sell shares by written request: Complete an Account Service Request
form, available from your Waddell & Reed financial advisor, or write a letter
of instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor,
or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the
address on the account.
Special Requirements for Selling Shares
<S> <C>
Account Type Special Requirements
Retirement Account The written instructions must be
signed by a properly authorized
person.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
Trust The trustee must sign the written instructions indicating
capacity as trustee. If the trustee's name is not in the
account registration, provide a currently certified copy
of the trust document.
Business or At least one person authorized by
Organization corporate resolution to act on the
account must sign the written
instructions.
</TABLE>
When you place an order to sell shares, your shares will be sold at the
next NAV calculated after receipt of a written request for redemption in good
order by Waddell & Reed, Inc. at its home office. Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that
the check has cleared and been honored. If not, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or the
date the Fund can verify that your purchase check has cleared and been
honored.
o Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Fund shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements to
sell Fund shares. The Fund will be deemed to have received your order to
sell shares when that firm (or its designee) has received your order. Your
order will receive the offering price next calculated after the order has
been received in proper form by the authorized firm (or its designee). You
should consult that firm to determine the time by which it must receive
your order for you to sell Fund shares at that day's price.
The Fund may require a signature guarantee in certain
15
<PAGE>
situations such as:
o a redemption request is made by a corporation, partnership or fiduciary;
o a redemption request is made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement protects you and Waddell & Reed from fraud. You can
obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
The Fund reserves the right to redeem at NAV all shares of the Fund owned
by you having an aggregate NAV of less than $500. The Fund will give you notice
and a 60-day opportunity to purchase a sufficient number of additional shares to
bring the aggregate NAV of your shares to $500.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your
account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide
personal service. Additionally, one toll-free call, 1-800-366-5465, connects you
to a Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Service staff is
available to answer your questions or update your account records. At almost any
time of the day or night, you may access TeleWaddell from a touch-tone phone to:
o Obtain information about your accounts;
16
<PAGE>
o Obtain price information about other funds in the United Group; or
o Request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, exchange, transfer or
redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one account
with the Fund. Call the telephone number listed above for Customer Service if
you need copies of annual or semiannual reports or account information.
Exchanges
You may sell your Class Y shares and buy Class Y shares of other funds in
the United Group or Class A shares of United Cash Management, Inc. You may
exchange only into funds that are legally permitted for sale in your state of
residence. Note that exchanges out of the Fund may have tax consequences for
you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange
privileges at any time, upon notice in certain instances.
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and
net capital gains to its shareholders each year.
Usually the Fund distributes net investment income monthly. Net capital
gains usually are distributed in December.
Distribution Options. When you open an account, specify on your
application how you want to receive your distributions. The Fund offers three
options:
1. Share Payment Option. Your dividends, capital gains and other
distributions will be automatically paid in additional Class Y shares of
the Fund. If you do not
17
<PAGE>
indicate a choice on your application, you will be
assigned this option.
2. Income-Earned Option. Your capital gains and other distributions will be
automatically paid in Class Y shares, but you will be sent a check for
each dividend distribution.
3. Cash Option. You will be sent a check for your dividends, capital gains
and other distributions.
For retirement accounts, all distributions are automatically paid in Class
Y shares.
Taxes
As with any investment, you should consider how your investment in the
Fund will be taxed. You should be aware of the following tax implications:
Taxes on distributions. The distributions by the Fund that are designated
by it as exempt-interest dividends generally may be excluded by you from your
gross income. Dividends from the Fund's investment company taxable income
generally are taxable to you as ordinary income, whether received in cash or
paid in additional Fund shares. Distributions of the Fund's net capital gain,
when designated as such, are taxable to you as long-term capital gain, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund)
generally are taxed at a maximum rate of 20%. None of the dividends paid by the
Fund is expected to be eligible for the dividends-received deduction allowed to
corporations. The Fund notifies you after year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
Exempt-interest dividends paid by the Fund may be subject to income
taxation under state and local tax laws. In addition, a portion of those
dividends is expected to be attributable to interest on certain bonds that must
be treated by you as a "tax preference item" for purposes of calculating your
liability, if any, for the AMT; the Fund anticipates such portion will be not
more than 40% of the dividends it will pay to its shareholders. The Fund will
provide you with information concerning the amount of distributions that must be
treated as a tax preference item after the end of each calendar year.
Shareholders who may be subject to the AMT should consult with their tax
advisers concerning investment in the Fund.
18
<PAGE>
Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by private activity bonds
("PABs") should consult their tax advisers before purchasing Fund shares
because, for users of certain of these facilities, the interest on PABs is not
exempt from Federal income tax. For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in
trade or business a part of a facility financed from the proceeds of PABs.
Withholding. The Fund is required to withhold 31% of all taxable
dividends, capital gains distributions and redemption proceeds payable to
individuals and certain other noncorporate shareholders who do not furnish the
Fund with a correct taxpayer identification number. Withholding at that rate
from taxable dividends and capital gains distributions also is required for such
shareholders who otherwise are subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in
taxable gain or loss to you, depending on whether the redemption proceeds are
more or less than what you paid for the redeemed shares. If you have a gain on a
redemption of Fund shares, the entire gain will be taxable even though a portion
of the gain may represent municipal bond interest earned by the Fund but not yet
paid out as a dividend. If the redemption is not made until after record date,
however, that interest will be received by you as a dividend that is tax-exempt
rather than as part of a taxable gain. Ordinarily, record date is the first
Friday after the 9th day of each month.
An exchange of Fund shares for shares of any other fund in the United
Group generally will have similar tax consequences. In addition, if you purchase
Fund shares within thirty days before or after redeeming other Fund shares
(regardless of class) at a loss, part or all of that loss will not be deductible
and will increase the basis of the newly purchased shares.
Interest on indebtedness incurred or continued to purchase or carry shares
of the Fund will not be deductible for Federal income tax purposes to the extent
the Fund's distributions consist of exempt-interest dividends. Proposals may be
introduced before Congress for the purpose of restricting or eliminating the
Federal income tax exemption for interest on municipal bonds. If such a proposal
were enacted, the availability of municipal bonds for investment by the Fund and
the value of its portfolio would be affected. In that event,
19
<PAGE>
the Fund may decide to reevaluate its investment goal and policies.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for more information. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
20
<PAGE>
The Management of the Fund
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's
Board of Directors. WRIMCO provides investment advice to the Fund and supervises
the Fund's investments. Waddell & Reed, Inc. and its predecessors have served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to Target/United Funds,
Inc. since that fund's inception, until January 8, 1992, when it assigned its
duties as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992 and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
John M. Holliday is primarily responsible for the management of the
portfolio of the Fund. Mr. Holliday has held his Fund responsibilities since May
23, 1980. He is Senior Vice President of WRIMCO, Vice President of the Fund and
Vice President of other investment companies for which WRIMCO serves as
investment manager. From July 1986 to March 1998, Mr. Holliday was Senior Vice
President of Waddell and Reed Asset Management Company, a former affiliate of
WRIMCO. Mr. Holliday has served as the portfolio manager for investment
companies managed by Waddell & Reed, Inc. and its successor, WRIMCO, since
August 1979, and has been an employee of Waddell & Reed, Inc. and its successor,
WRIMCO, since April 1978.
Other members of WRIMCO's investment management department provide input
on market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217.
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
21
<PAGE>
The Fund pays a management fee to WRIMCO for providing investment advice
and supervising its investments. The Fund also pays other expenses, which are
explained below.
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily. The specific fee is
computed on the Fund's net asset value as of the close of business each day at
the annual rate of .03 of 1% of its net assets. The group fee is a pro rata
participation based on the relative net asset size of the Fund in the group fee
computed each day on the combined net asset values of all the funds in the
United Group at the annual rates shown in the following table:
Group Fee Rate
<TABLE>
<CAPTION>
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
<S> <C>
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
</TABLE>
Growth in assets of the United Group assures a lower group fee rate.
22
<PAGE>
The combined net asset values of all of the funds in the United Group were
approximately $18.9 billion as of September 30, 1998. Management fees for the
fiscal year ended September 30, 1998 were 0.42% of the Fund's average net
assets, which during that period consisted only of the Fund's Class A shares.
23
<PAGE>
United Municipal Bond Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Avenue, N. W. (913) 236-2000
Washington, D. C. 20036 (800) 366-5465
Independent Auditors Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
24
<PAGE>
United Municipal Bond Fund, Inc.
Class Y Shares
PROSPECTUS
January 31, 1999
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated January 31, 1999,
which contains detailed information about the Fund, particularly its
investment policies and practices. You may not be aware of important
information about the Fund unless you read both the Prospectus and the
SAI. The current SAI is on file with the Securities and Exchange
Commission (SEC) and it is incorporated into this Prospectus by
reference (that is, the SAI is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the
Fund's actual investments and include financial statements as of the
close of the particular annual or semiannual period. The annual report
also contains a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during
the year covered by the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below or through
certain third parties through which shares of the Fund may be purchased.
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-2657.
WADDELL & REED, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
printed on recycled paper NUP2008-Y(1-99)
25
<PAGE>
11/20/98
4:14 PM
UNITED MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
January 31, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with a prospectus ("Prospectus")
for the Class A shares or the Class Y shares, as applicable, of United Municipal
Bond Fund, Inc. (the "Fund"), dated January 31, 1999, which may be obtained from
the Fund or its underwriter, Waddell & Reed, Inc., at the address or telephone
number shown above.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Performance Information ....................................... 2
Investment Srategies Policies and Practices.................... 4
Investment Management and Other Services ...................... 32
Purchase, Redemption and Pricing of Shares .................... 38
Directors and Officers ........................................ 49
Payments to Shareholders ...................................... 56
Taxes ......................................................... 57
Portfolio Transactions and Brokerage .......................... 62
Other Information ............................................. 63
Appendix A .................................................... 65
Financial Statements ..........................................
</TABLE>
<PAGE>
United Municipal Bond Fund, Inc. is a mutual fund: an investment that
pools shareholders' money and invests it toward a specified goal. In
technical terms, the Fund is an open-end, diversified management company
organized as a Maryland corporation on September 29, 1976.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from time
to time, publish the Fund's total return information, yield information and/or
performance rankings in advertisements and sales materials.
Total Return
Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 4.25%. All dividends and distributions are assumed to be
reinvested in shares of the applicable class at net asset value for the class as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for
the periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
September 30, 1998, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
2
<PAGE>
<TABLE>
<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
-------- --------
<S> <C> <C>
One-year period from October 1, 1997 to
September 30, 1998: 4.05% 8.67%
Five-year period from October 1, 1993 to
September 30, 1998: 5.57% 6.49%
Ten-year period from October 1, 1988 to
September 30, 1998: 8.39% 8.86%
</TABLE>
Prior to January 21, 1996, the Fund offered only one class of shares to
the public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.
The Fund may also quote unaveraged or cumulative total return for a class
which reflects the change in value of an investment in that class over a stated
period of time. Cumulative total returns will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
Yield
Yield refers to the income generated by an investment in the Fund over a
given period of time. A yield quoted for a class of the Fund is computed by
dividing the net investment income per share of that class earned during the
period for which the yield is shown by the maximum offering price per share of
that class on the last day of that period according to the following formula:
6
Yield = 2 ((((a - b)/cd)+1)- 1)
Where with respect to a particular class of the Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class outstanding
during the period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last
day of the period.
The yield for Class A shares of the Fund computed according to the formula
for the 30-day period ended on September 30, 1998, the date of the most recent
balance sheet included in this SAI, is 4.15%.
3
<PAGE>
The Fund may also advertise or include in sales material its
tax-equivalent yield, which is calculated by applying the stated income tax rate
to only the net investment income exempt from taxation according to a standard
formula which provides for computation of tax-equivalent yield by dividing that
portion of the Fund's yield which is tax exempt by one minus a stated income tax
rate and adding the product to that portion, if any, of the yield of the Fund
that is not tax exempt.
The tax-equivalent yield computed according to the formula for the 30-day
period ended on September 30, 1998, the date of the most recent balance sheet
included in this SAI, is %, %, %, % and % for marginal tax brackets of 15%, 28%,
31%, 36% and 39.6%, respectively.
Change in yields primarily reflect different interest rates received by
the Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses of
the applicable class.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical Services,
Inc., or by publications of general interest such as Forbes, Money, The Wall
Street Journal, Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. Each class of the Fund may also compare its performance to that of other
selected mutual funds or selected recognized market indicators such as the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
related, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager,
4
<PAGE>
Waddell & Reed Investment Management Company ("WRIMCO"), may employ and the
types of instruments in which the Fund may invest, in pursuit of the Fund's
goal. A summary of the risks associated with these instrument types and
investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Fund.
Municipal Bonds
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various public purposes. The two main kinds of
municipal bonds are "general obligation" bonds and "revenue" bonds. For "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
A special class of municipal bonds issued by state and local government
authorities and agencies are industrial development bonds ("IDBs"). The Fund may
purchase IDBs only if the interest on them is free from Federal income taxation,
although such interest is an item of tax preference for purposes of the Federal
alternative minimum tax. In general, IDBs are revenue bonds and are issued by or
on behalf of public authorities to obtain funds to finance privately operated
facilities for business and manufacturing, sports and pollution control. IDBs
are also used to finance public facilities such as airports and mass transit
systems. The credit quality of IDBs is usually directly related to the credit
standing of the user of the facilities being financed. The Fund may invest an
unlimited percentage of its assets in municipal bonds that are IDBs.
Municipal leases and participation interests therein are another type of
municipal bond (collectively, "Lease Obligations"). These obligations, which may
take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a variety of equipment and facilities. The
5
<PAGE>
factors to be considered in determining whether or not any rated municipal lease
obligations are liquid include (i) the frequency of trades and quotes for the
obligations, (ii) the number of dealers willing to purchase or sell the security
and the number of other potential buyers, (iii) the willingness of dealers to
undertake to make a market in the securities, (iv) the nature of marketplace
trades, including the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer, (v) the likelihood that the
marketability of the obligation will be maintained through the time the
instrument is held, (vi) the credit quality of the issuer and the lessee, and
(vii) the essentiality to the lessee of the property covered by the lease.
Unrated municipal lease obligations are considered illiquid.
The Fund has not held and does not intend to hold municipal lease
obligations directly as a lessor of the property, but may from time to time
purchase a participation interest in a municipal obligation from a bank or other
third party. A participation interest gives the Fund a specified, undivided
interest in the obligation in proportion to its purchased interest in the total
amount of the obligation. Municipal leases frequently have risks distinct from
those associated with general obligation or revenue bonds. State constitutions
and statutes set forth requirements that states or municipalities must meet to
incur debt, including voter referenda, interest rate limits or public sale
requirements. Leases, installment purchases or conditional sale contracts have
evolved as a means for governmental issuers to acquire property and equipment
without being required to meet these constitutional and statutory requirements.
Many leases and contracts include "non-appropriation clauses" providing that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the legislative body
on a yearly or other periodic basis. Non-appropriation clauses free the issuer
from debt issuance limitations. In determining the liquidity of a municipal
lease obligation, WRIMCO will differentiate between direct interests in
municipal leases and municipal lease-backed securities, the latter of which may
take the form of a lease-backed revenue bond, a tax-exempt asset-backed security
or any other investment structure using a municipal lease-purchased agreement as
its base. See "Asset-Backed Securities." While the former may present liquidity
issues, the latter are based on a well established method of securing payment of
a municipal lease obligation.
WRIMCO and the Fund rely on the opinion of bond counsel for the issuer in
determining whether obligations are municipal bonds. If a court holds that an
obligation held by the Fund is not a municipal bond (i.e., that the interest
thereon is
6
<PAGE>
taxable), the Fund will sell the obligation as soon as possible, but
it might incur a loss upon such sale.
Municipal bonds vary widely as to their interest rates, degree of security
and maturity. Bonds are selected on the basis of quality, yield and
diversification. Factors that affect the yield on municipal bonds include
general money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the nature of the issue.
Lower-rated bonds usually, but not always, have higher yields than similar but
higher-rated bonds.
Medium- or lower-rated municipal securities are frequently traded only in
markets where the number of potential purchasers and sellers, if any, is very
limited. This factor may have the effect of limiting the availability of the
securities for purchase by the Fund and may also limit the ability of the Fund
to sell such securities at their fair value either to meet redemption requests
or in response to changes in the economy or the financial markets.
Lower-quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by the Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in the Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise to exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. See Appendix A for a description of bond ratings.
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Now or in the future, Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), and Moody's Investors Service, Inc. ("MIS") may use
different rating designations for municipal bonds depending on their maturities
on issuance or other characteristics. For example, MIS now rates the top four
categories of "municipal notes" (i.e., municipal bonds generally with a maturity
at the time of issuance ranging from six months to three years) as MIG 1, MIG 2,
MIG 3 and MIG 4. Municipal bonds purchased by the Fund comply with the 80%
requirement discussed in the Prospectus if they are within the top four rating
designations of S&P or MIS for the type of municipal bond in question. Credit
ratings for individual securities may change from time to time, and the Fund is
not required to dispose of any municipal bond if its rating falls below the
rating required for its purchase, nor does such a fall in rating affect the
amount of unrated municipal bonds which the Fund may buy.
Bonds Backed by Generating Plants Revenue
From time to time the Fund may have varying but substantial portions of
its assets invested in municipal bonds of Public Power Agencies and in Pollution
Control Revenue Bonds which are IDBs. The interest on both types of bonds is
paid by revenues from generating plants. The Fund may invest any portion of its
assets in these bonds, and it is expected that there may be times, depending on
economic conditions in the industry or the relative attractiveness of other
municipal bonds, when more than 25% of its assets will be so invested.
Certain problems facing the generating industry in general may or may not
affect its ability to meet obligations on bonds. These problems include the
effects of (i) inflation on financing large construction programs, (ii) cost
increases and delays arising out of environmental considerations, (iii)
limitations of available capital on the ability to issue additional debt, (iv)
the effect of shortages and high prices of fuel on operations and profits, and
(v) the effect of energy conservation on sales. Problems of these types
generally affect the values of and the dividends paid on utility common stocks
rather than the ability to pay bond obligations.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase municipal bonds on a when-issued or delayed-delivery
basis or sell them on a delayed-delivery basis. In either case, payment and
delivery for the bonds take place at a future date. The bonds so purchased or
sold by the Fund are subject to market fluctuation; their value may be less or
more when delivered than the purchase price paid or received. When purchasing
bonds on a when-issued or delayed-delivery basis, the Fund assumes the rights
and risks of ownership, including the risk of price and yield fluctuations.
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No interest accrues to the Fund until delivery and payment is completed. When
the Fund makes a commitment to purchase municipal bonds on a when-issued or
delayed-delivery basis, it will record the transaction and thereafter reflect
the value of the bonds in determining its net asset value per share. When the
Fund sells a municipal bond on a delayed-delivery basis, the Fund does not
participate in further gains or losses with respect to the bond. When the Fund
makes a commitment to sell municipal bonds on a delayed basis, it will record
the transaction and thereafter value the bonds at the sales price in determining
the Fund's net asset value per share. If the other party to a delayed-delivery
transaction fails to deliver or pay for the bonds, the Fund could miss a
favorable price or yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases municipal bonds on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of the
bonds. However, before the bonds are delivered to the Fund and before it has
paid for them (the "settlement date"), the Fund could sell the bonds if WRIMCO
decided it was advisable to do so for investment reasons. The Fund will hold
aside or segregate cash or other securities, other than those purchased on a
when-issued or delayed-delivery basis, at least equal to the amount it will have
to pay on the settlement date; these other securities may, however, be sold at
or before the settlement date to pay the purchase price of the when-issued or
delayed-delivery bonds.
Limited Investment in Other Debt Securities
All of the Fund's invested assets, other than cash or receivables, must be
invested in municipal bonds, except that a limited amount of assets may be
invested in specified debt securities that are referred to in the Prospectus as
taxable obligations and in repurchase agreements and certain derivative
instruments (see discussion below). The Fund may invest in taxable obligations
only if, after any such investment, not more than 10% of its assets would
consist of taxable obligations. The only taxable obligations that the Fund may
purchase are (i) obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government Securities"), (ii) bank
obligations of domestic banks or savings and loan associations that are subject
to regulation by the U.S. Government (which obligations may include certificates
of deposit, letters of credit and acceptances), and (iii) commercial paper. The
taxable commercial paper the Fund may buy must, at
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the time of purchase, be rated at least A by S&P or MIS. See Appendix A for a
description of these ratings.
Defensive Strategies and Temporary Investments
To shorten the average maturity its portfolio, the Fund may buy municipal
bonds that are payable in a relatively short time. This could be either because
they were so payable when they were first issued or because they will mature
shortly after purchase.
Another reason for buying either these short-term municipal bonds or
taxable obligations (up to the 10% limitation on taxable obligations described
in the Prospectus) during normal market conditions is to keep assets at work
until appropriate investments in longer-term municipal bonds can be made or in
order to have cash available to pay for redemptions.
Short-term municipal bonds or taxable obligations purchased for defensive
purposes will be held for as long as WRIMCO believes a temporary defensive
posture should be maintained. When bought during normal conditions, they will be
held until appropriate investments in longer-term municipal bonds are made or
until they are sold to meet redemptions.
U.S. Government Securities
U.S. Government Securities are high quality debt instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or an agency or
instrumentality of the U.S. Government. These securities include Treasury Bills
(which mature within one year of the date they are issued), Treasury Notes
(which have maturities of one to ten years) and Treasury Bonds (which generally
have maturities of more than 10 years). All such Treasury securities are backed
by the full faith and credit of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others,
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such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.
U.S. Government Securities may include mortgage-backed securities issued
by U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities include
pass-through securities, participation certificates and collateralized mortgage
obligations. See "Mortgage-Backed Securities" and "Asset-Backed Securities."
Timely payment of principal and interest on Ginnie Mae pass-throughs is
guaranteed by the full faith and credit of the United States. Freddie Mac and
Fannie Mae are both instrumentalities of the U.S. Government, but their
obligations are not backed by the full faith and credit of the United States. It
is possible that the availability and the marketability (i.e., liquidity) of the
securities discussed in this section could be adversely affected by actions of
the U.S. Government to tighten the availability of its credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the holder
to any periodic payment of interest prior to maturity or that specify a future
date when the securities begin to pay current interest; instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon securities do not pay current income, their
prices can be very volatile when interest rates change and generally are subject
to greater price fluctuations in response to changing interest rates than prices
of comparable maturities that make current distributions of interest in cash.
The Fund may invest in zero coupon securities that are zero coupon bonds
of municipal and corporate issuers, "stripped" U.S. Treasury notes and bonds and
other securities that are issued with original issue discount ("OID"). The
Federal tax law requires that a holder of a security with OID accrue a ratable
portion of the OID on the security as income each year, even
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even though the holder may receive no interest payment on the security during
the year. Accordingly, although the Fund will receive no payments on its zero
coupon securities prior to their maturity or disposition, it will have current
income attributable to those securities and includable in the dividends paid to
its shareholders. Those dividends will be paid from the Fund's cash assets or by
liquidation of portfolio securities, if necessary, at a time when the Fund
otherwise might not have done so.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts) and TRs (Treasury
Receipts) are examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury security and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a government agency, or a corporation in zero coupon form.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one
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<PAGE>
of its agencies or instrumentalities, or they may be issued without any
government guarantee of the underlying mortgage assets but with some form of
non-government credit enhancement. These credit enhancements do not protect
investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both government
and non-government entities, such as banks, mortgage lenders, or other financial
institutions, as long as WRIMCO determines that it is consistent with the Fund's
goal and investment policies. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them if WRIMCO
determines they are consistent with the Fund's goal and investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when a U.S. Government agency or a financial institution separates
the interest and principal components of a mortgage-backed security and sells
them as individual securities. The holder of the "principal-only" security
("PO") receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security ("IO") receives
interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par, and
the yield to investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and evaluating them
requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution
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unaffiliated with the issuer, or other credit enhancements may be present. The
value of asset-backed securities may also depend on the creditworthiness of the
servicing agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average
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life for the pool. At present, mortgage pools, particularly those with loans
with other maturities or different characteristics, are priced on an assumption
of average life determined for each pool. In periods of declining interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities. Conversely, in periods of
rising interest rates, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. Changes in the rate or "speed"
of these payments can cause the value of the mortgage-backed securities to
fluctuate rapidly. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and in some
instances reduced liquidity of the CMO class.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries on dates prior to
their stated maturities. Floating rate securities have interest rates that
change whenever there is a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the interest rate.
These formulas are designed to result in a market value for the instrument that
approximates its par value.
Indexed Securities
The Fund may purchase securities the value of which varies in relation to
the value of other securities, securities indices or other financial indicators,
subject to its operating policy regarding derivative instruments. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The performance of indexed securities
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depends to a great extent on the performance of the security or other instrument
to which they are indexed and may also be influenced by interest rate changes in
the United States and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security and their values
may decline substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying investments.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "1933 Act"), or
in a registered public offering. Where registration is required, the Fund may be
obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
the Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when it decided to
seek registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities may be determined to be liquid in accordance with
guidelines adopted by the Board of Directors. See "Illiquid Investments" below.
Illiquid Investments
The Fund may not purchase a security if, as a result, more than 10% of its
net assets would consist of illiquid investments. Investments currently
considered to be illiquid include: (i) repurchase agreements not terminable
within seven days; (ii) securities for which market quotations are not readily
available; (iii) securities involved in swap, cap, collar and floor
transactions; (iv) bank deposits, unless they are payable at principal amount
plus accrued interest on demand or within seven days after demand; (v)
restricted securities not determined
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to be liquid pursuant to guidelines established by the Fund's Board of
Directors; (vi) non-government stripped fixed-rate mortgage-backed securities;
and (vii) over-the-counter ("OTC") options and their underlying collateral. The
assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option. If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 10% of its net assets
were invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements, subject
to its limitation on investment in illiquid investments. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that the
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays and expenses in
liquidating the underlying securities or other collateral, decline in their
value and loss of interest. The return on such collateral may be more or less
than that from the repurchase agreement. The Fund's repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Fund's custodian bank or
by a third party that qualifies as a custodian under Section 17(f) of the
Investment Company Act of 1940, as amended (the "1940 Act"), is and, during the
entire term of the agreement, will remain at least equal to the value of the
loan, including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO on the basis of
criteria established by the Fund's Board of Directors.
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Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, swaps, caps, collars,
floors, indexed securities and other derivative instruments (collectively,
"Financial Instruments") to attempt to (i) enhance income or yield, (ii) hedge
the Fund's investments, or (iii) manage other risks of the Fund's investments
that can affect fluctuation in its net asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge, the Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which the Fund has invested or expects to invest. Financial Instruments on
debt securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission (the "SEC"), the several exchanges
upon which they are traded and the
18
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Commodity Futures Trading Commission (the "CFTC"). In addition, the Fund's
ability to use Financial Instruments may be limited by tax considerations. See
"Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goal and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund might not
use any of these strategies, and there can be no assurance that any strategy
used will succeed. The Fund's Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular strategy
will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest
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in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
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(5) The Fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction ("counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities or other options or futures contracts, or (2)
cash and liquid assets with a value, marked to market daily, sufficient to cover
its potential obligations to the extent not covered as provided in (1) above.
The Fund will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in an
account with its custodian in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon price during
the option period. A put option gives the purchaser the right to sell, and
obligates the writer to buy, the underlying investment at the agreed-upon price
during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the purchase
of put options can serve as a short hedge. Writing put or call options can
enable the Fund to enhance income or yield by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates to
a price higher than the exercise price of the call option, it can be expected
that the option will be exercised and the Fund will be obligated to sell the
security at less than its market value. If the call
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option is an OTC option, the securities or other assets used as
cover would be considered illiquid to the extent described under "Illiquid
Investments."
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the Fund will be obligated to purchase the security
at more than its market value. If the put option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of leverage,
which will result in the Fund's net asset value being more sensitive to changes
in the value of the related instrument.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counterparty
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases an OTC option, it relies on the counterparty from
whom it purchased the
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<PAGE>
option to make or take delivery of the underlying investment upon exercise of
the option. Failure by the counterparty to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. There can be no assurance that the Fund will in fact be able to close
out an OTC option position at a favorable price prior to expiration. In the
event of insolvency of the counterparty, the Fund might be unable to close out
an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("multiplier"),
which determines the total dollar value for each point of such difference. When
the Fund buys a call on an index, it pays a premium and has the same rights as
to such call as are indicated above. When the Fund buys a put on an index, it
pays a premium and has the right, prior to the expiration date, to require the
seller of the put, upon the Fund's exercise of the put, to deliver to the Fund
an amount of cash if the closing level of the index upon which the put is based
is less than the exercise price of the put, which amount of cash is determined
by the multiplier, as described above for calls. When the Fund writes a put on
an index, it receives a premium and the purchaser of the put has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the index and the
exercise price times the multiplier if the closing level is less than the
exercise price.
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Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a debt security, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund purchases an index option and exercises it before the closing
index value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
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established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Futures Contracts and Options on Futures Contracts. The purchase of
futures contracts or call options on futures contracts can serve as a long
hedge, and the sale of futures contracts or the purchase of put options on
futures contracts can serve as a short hedge. Writing call options on futures
contracts can serve as a limited short hedge, using a strategy similar to that
used for writing call options on securities or indices. Similarly, writing put
options on futures contracts can serve as a limited long hedge. Futures
contracts and options on futures contracts can also be purchased and sold to
attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average duration
of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average
duration of the Fund's fixed-income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If WRIMCO wishes to lengthen the average duration of the Fund's
fixed-income portfolio, the Fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price
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<PAGE>
movements. If the Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures contracts and options on
futures contracts may be closed only on an exchange or board of trade that
provides a secondary market. However, there can be no assurance that a liquid
secondary market will exist for a particular contract at a particular time. In
such event, it may not be possible to close a futures contract or options
position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain cash or
liquid assets in an account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following factors, which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest
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<PAGE>
rate or debt market trends by WRIMCO may still not result in a successful
transaction. WRIMCO may be incorrect in its expectations as to the extent of
various interest rate or debt market movements or the time span within which the
movements take place.
Index Futures. The risk of imperfect correlation between movements in the
price of an index future and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts or options on
futures contracts, in each case other than for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums required to
establish those positions
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(excluding the amount by which options are "in-the-money" at the time of
purchase) will not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts and
options on futures contracts.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures contracts, to adjust the risk
and return characteristics of its overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the
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extent that a specified index exceeds a predetermined value, to receive payments
on a notional principal amount from the party selling the cap. The purchase of a
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined value, to receive payments on a notional principal amount from the
party selling the floor. A collar combines elements of buying a cap and selling
a floor.
Swap agreements, including caps, collars and floors, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect the
Fund's exposure to long- or short-term interest rates, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. Caps and floors have an effect similar to buying
or writing options.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO in accordance with procedures adopted by
the Fund's Board of Directors. If a firm's creditworthiness declines, the value
of the agreement would be likely to decline, potentially resulting in losses. If
a default occurs by the other party to such transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The position of the SEC is that assets involved in swap
transactions are illiquid and are, therefore, subject to the limitations on
investing in illiquid securities.
Borrowing
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
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Investment Restrictions and Limitations
Certain of the Fund's investment restrictions, policies and other
limitations are described in the Prospectus and this SAI. The following are the
Fund's fundamental investment limitations set forth in their entirety, which,
like the Fund's goal, cannot be changed without shareholder approval. For this
purpose, shareholder approval means the approval, at a meeting of Fund
shareholders, by the lesser of (1) the holders of 67% or more of the Fund's
shares represented at the meeting, if more than 50% of the Fund's outstanding
shares are present in person or by proxy or (2) more than 50% of the Fund's
outstanding shares. The Fund may not:
(i) Make any investments other than in the municipal bonds and in the
taxable obligations, options, futures contracts and other
financial instruments described in the Prospectus. Further, such
municipal bonds and taxable obligations are subject to the
percentage limitations and the quality restrictions described in
the Prospectus. Thus, the Fund may not purchase any voting
securities; purchase or sell physical commodities; however, this
policy shall not prevent the Fund from purchasing and selling
foreign currency, futures contracts, options, forward contracts,
swaps, caps, collars, floors and other Financial Instruments; or
purchase any real estate or interests in real estate investment
trusts or any investment company securities;
(ii) Lend money or other assets; the Fund may, however, buy debt
securities and other obligations consistent with its goal and other
investment policies and restrictions;
(iii) Invest for the purpose of exercising control or management of other
companies;
(iv) Sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this
policy does not prevent the Fund from entering into short
positions in foreign currency, futures contracts, options,
forward contracts, swaps, caps, collars, floors and other
financial instruments, (2) the Fund may obtain such short-term
credits as are necessary for the clearance of transactions, and
(3) the Fund may make margin payments in connection with futures
contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments;
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(v) Participate on a joint, or a joint and several basis, in any trading
account in securities;
(vi) Engage in the underwriting of securities, that is, the selling of
securities for others;
(vii) With respect to 75% of its total assets, purchase securities of any
one issuer (other than cash items and "Government securities" as
defined in the 1940 Act), if immediately after and as a result of
such purchase, the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the value of the Fund's
total assets; or
(viii) Purchase securities of issuers in any one industry except for
municipal bonds and U.S. Government Securities if more than 25% of
the value of its assets would then be invested in issuers in that
industry; or
(ix) issue senior securities.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) The Fund does not currently intend to purchase the securities of
any issuer (other than securities issued or guaranteed by
domestic governments or political subdivisions thereof) if, as a
result, more than 5% of its total assets would be invested in the
securities of enterprises that, including predecessors, have a
record of less than three years of continuous operation. This
restriction does not apply to any obligations issued or
guaranteed by the U.S. government or a state or local government
authority, or their respective instrumentalities, or to
collateralized mortgage obligations, other mortgage-related
securities, asset-backed securities, indexed securities or
over-the-counter derivative instruments.
(ii) The Fund does not intend to invest more than 5% of its assets in
U.S. government securities.
(iii) The Fund may not purchase a security if, as a result, more than 10%
of its net assets would consist of illiquid securities.
(iv) The Fund does not intend to purchase IDBs that finance facilities
(other than utilities) of nongovernmental users if, as a result,
more than 25% of its assets would be invested in issuers in any one
industry.
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<PAGE>
An investment policy or limitation that states a maximum percentage of the
Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year, as well as within a particular year, and may be
affected by cash requirements for the redemption of its shares. For fiscal years
1998 and 1997 the portfolio turnover rates were 50.65% and 47.24%, respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Board of Directors prior to approving any Shareholder
Servicing Agreement or Accounting Services Agreement.
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<PAGE>
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly
owned subsidiary of Waddell & Reed Financial, Inc., a publicly held company.
The address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds,
except United Asset Strategy Fund, Inc., since 1940 or the company's inception
date, whichever was later, and to Target/United Funds, Inc. since that fund's
inception, until January 8, 1992 when it assigned its duties as investment
manager for these funds (and the related professional staff) to WRIMCO. WRIMCO
has also served as investment manager for Waddell & Reed Funds, Inc. since its
inception in September 1992, and United Asset Strategy Fund, Inc. since it
commenced operations in March 1995. Waddell & Reed, Inc. serves as principal
underwriter for the investment companies in the United Group of Mutual Funds and
Waddell & Reed Funds, Inc. and acts as principal underwriter and distributor for
variable life insurance and variable annuity policies issued by United Investors
Life Insurance Company for which Target/United Funds, Inc. is the underlying
investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares,
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<PAGE>
and preparation of prospectuses for existing shareholders, proxy statements and
certain reports. A new Accounting Services Agreement, or amendments to an
existing one, may be approved by the Fund's Board of Directors without
shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the Fund
pays WRIMCO a fee as described in the Prospectus.
The management fees paid to WRIMCO for the fiscal years ended September
30, 1998, 1997 and 1996 were $4,183,289, $4,208,872 and $4,344,734,
respectively.
For purposes of calculating the daily fee, the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which it has sold but not yet paid
the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement with respect to Class A shares,
the Fund pays the Agent a monthly fee of $1.3125 for each shareholder account
that was in existence at any time during the prior month, plus $0.30 for each
account on which a dividend or distribution, of cash or shares, had a record
date in that month. For Class Y shares, the Fund pays the Agent a monthly fee
equal to one-twelfth of .15 of 1% of the average daily net assets of that class
for the preceding month. The Fund also pays certain out-of-pocket expenses of
the Agent, including long distance telephone communications costs, microfilm and
storage costs for certain documents, forms, printing and mailing costs, and
costs of legal and special services not provided by Waddell & Reed, Inc., WRIMCO
or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
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<PAGE>
Accounting Services Fee
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C> <C> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
The fees paid to the Agent for accounting services for the fiscal years
ended September 30, 1998, 1997 and 1996 were $86,250, $86,250 and $90,000,
respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.
Waddell & Reed. Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended September
30, 1998, 1997 and 1996 were $1,153,458, $900,465 and $1,203,218, respectively.
The amounts retained by Waddell & Reed, Inc. for each period were $489,470,
$389,479 and $523,700, respectively.
No portion of the sales charge is reallowed to dealers. A major portion of
the sales charge for Class A shares is paid to account representatives and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its account
representatives as to purchases for which there is no sales charge.
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<PAGE>
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Distribution and Service Plan for Class A shares (the "Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with the distribution of the Class A shares and/or the
service and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated for Class A shares, to make distribution of shares also
through other broker-dealers. In distributing shares through its sales force,
Waddell & Reed, Inc. will pay commissions and incentives to the sales force at
or about the time of sale and will incur other expenses including costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Plan permits Waddell & Reed, Inc. to receive
reimbursement for these Class A-related distribution activities through the
distribution fee, subject to the limit contained in the Plan. The Plan also
permits Waddell & Reed, Inc. to be reimbursed for amounts it expends in
compensating, training and supporting registered account representatives, sales
managers and/or other appropriate personnel in providing personal services to
Class A shareholders of the Fund and/or maintaining Class A shareholder
accounts; increasing services provided to Class A shareholders of the Fund by
office personnel located at field sales offices; engaging in other activities
useful in providing personal service to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts; and in compensating broker-dealers
who may regularly sell Class A shares of the Fund, and other third parties, for
providing shareholder services and/or maintaining shareholder accounts with
respect to Class A shares.
Service fees and distribution fees in the amount of $1,900,103 and
$10,307, respectively, were paid (or accrued) by the Fund with respect to Class
A shares for the fiscal year ended September 30, 1998. To the extent that
Waddell & Reed, Inc. incurs expenses for which reimbursement may be made under
the Plan that relate to distribution activities also involving another fund in
the United Group of Funds or Waddell & Reed Funds, Inc., Waddell & Reed, Inc.
typically determines the amount attributable to the Fund's expenses under
36
<PAGE>
the Plan on the basis of a combination of the respective classes' relative net
assets and number of shareholder accounts.
The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of
the Plan are the officers and Directors who are also officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. The Plan is
anticipated to benefit the Fund and its Class A shareholders through Waddell &
Reed, Inc.'s activities not only to distribute the Class A shares of the Fund
but also to provide personal services to Class A shareholders and thereby
promote the maintenance of their accounts with the Fund. The Fund anticipates
that Class A shareholders may benefit to the extent that Waddell & Reed's
activities are successful in increasing the assets of the Fund, through
increased sales or reduced redemptions, or a combination of these, and reducing
a Class A shareholder's share of Fund and Class A expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal of the
Fund. Further, continuing sales of Class A shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and Class A shareholders.
The Plan was approved by the Fund's Board of Directors, including the Directors
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the operations of the Plan or any agreement referred to in
the Plan (hereafter, the "Plan Directors"). The Plan was also approved by the
affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding Class A shares of the Fund, and (iv)
while the Plan remains in effect, the selection and nomination of the Directors
who are Plan Directors will be committed to the discretion of the Plan
Directors.
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<PAGE>
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In general,
the Custodian is responsible for holding the Fund's cash and securities.
Deloitte & Touche LLP, Kansas City, Missouri, the Fund's independent auditors,
audits the Fund's financial statements.
Year 2000 Issue
Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by WRIMCO and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." WRIMCO is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Fund's other, major
service providers. Although there can be no assurances, WRIMCO believes these
steps will be sufficient to avoid any adverse impact on the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the value
of the assets of that class, less that class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
September 30, 1998 was as follows:
Netasset value per Class A share (Class A net assets divided by Class A
shares
outstanding) ...................................... $7.63
Add: selling commission (4.25% of offering
price) ............................................ .34
-----
Maximum offering price per Class A share (Class A net asset value divided
by 95.75%)......................................... $7.97
=====
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class Y share is its net
38
<PAGE>
asset value next determined following acceptance of a purchase order. The number
of shares you receive for your purchase depends on the next offering price after
Waddell & Reed, Inc. receives and accepts your order at its principal business
office at the address shown on the cover of this SAI. You will be sent a
confirmation after your purchase which will indicate how many shares you have
purchased. Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the New York Stock Exchange (the "NYSE") is open for
trading as of the later of the close of the regular session of the NYSE or the
close of the regular session of any domestic securities or commodities exchange
on which an option or future held by the Fund is traded. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that the NYSE will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
it is possible that the NYSE may close on other days. The net asset value will
change every business day, since the value of the assets and the number of
shares outstanding change every day.
The Board of Directors has decided to use the prices provided by an
independent pricing service to value municipal bonds. The Board of Directors
believes that such a service does quote the securities' fair value. The Board of
Directors, however, may hereafter determine to use another service or use the
bid price quoted by dealers if it should determine that such service or quotes
more accurately reflect the fair value of municipal bonds held by the Fund.
Short-term debt securities are valued at amortized cost, which
approximates market. Securities or other assets that are not valued by either of
the foregoing methods and for which market quotations are not readily available
would be valued by appraisal at their fair value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the Board of Directors.
Options and futures contracts purchased and held by the Fund are valued at
the last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. Ordinarily, the close of the regular session for options trading
on national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a
39
<PAGE>
futures contract purchased by the Fund will be either the closing price of that
contract or the bid price. Conversely, the value of a futures contract sold by
the Fund will be either the closing price or the asked price.
Minimum Initial and Subsequent Investments
For Class A shares, initial investments must be at least $500 with the
exceptions described in this paragraph. A $100 minimum initial investment
pertains to certain exchanges of shares from another fund in the United Group. A
$50 minimum initial investment pertains to accounts for which an investor has
arranged, at the time of initial investment, to make subsequent purchases for
the account by having regular monthly withdrawals of $25 or more made from a
bank account. A minimum initial investment of $25 is applicable to purchases
made through payroll deduction for or by employees of WRIMCO, Waddell & Reed,
Inc. or their affiliates. Except with respect to certain exchanges and automatic
withdrawals from a bank account, a shareholder may make subsequent investments
of any amount. See "Exchanges for Shares of Other Funds in the United Group."
For Class Y shares, investments by government entities or authorities or
by corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other Class
Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges. The
schedule of sales charges appears in the Prospectus for Class A shares. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories. References to purchases in an Individual
Retirement Account ("IRA") or other retirement plan (for which investments in
the Fund would not be appropriate) are made only to illustrate how purchases of
Fund shares may be grouped with purchases made in other funds in the United
Group.
1. Purchases by an individual for his or her own account (includes
purchases under the United Funds Revocable Trust form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes United Funds Revocable Trust Form of spouse);
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<PAGE>
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gifts to Minors Act ("UGMA") or Uniform Transfers to Minors Act
("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her IRA,
salary reduction plan account under Section 457 of the Internal Revenue
Code of 1986, as amended (the "Code"), provided that such purchases are
subject to a sales charge (see "Net Asset Value Purchases"), tax-sheltered
annuity account ("TSA") or Keogh plan account, provided that the
individual and spouse are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may
not be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in
the trust account is eligible for grouping with an IRA account of W,
H's wife;
C. H's will provides for the establishment of a trust for the benefit
of his minor children upon H's death; his bank is named as trustee;
upon H's death, an account is established in the name of the bank,
as trustee; a purchase in the account may be grouped with an account
held by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account
may not be grouped with R's individual account. If X's spouse, Y,
was successor trustee, this purchase could be grouped with Y's
individual account.
Account grouping as described above is available under the following
circumstances.
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<PAGE>
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $100,000; at the same
time, H's parents open up two UGMA accounts for H and W's two minor
children and invest $100,000 in each child's name; the combined
purchases of Class A shares are subject to the reduced sales load
applicable to a purchase of $300,000 provided that Waddell & Reed,
Inc. is advised that the purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a net asset value of $100,000. His
wife, W, now wishes to invest $15,000 in Class A shares of the
Fund. W's purchase will be combined with H's existing account
and will be entitled to the reduced sales charge applicable to a
purchase in excess of $100,000. H's original $100,000 purchase
was subject to a full sales charge and the reduced charge does
not apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under such plan may be combined with the additional
purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of
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<PAGE>
Intention. By signing a Statement of Intention form, which is available from
Waddell & Reed, Inc., the purchaser indicates an intention to invest, over a
13-month period, a dollar amount which is sufficient to qualify for a reduced
sales charge. The 13-month period begins on the date the first purchase made
under the Statement of Intention is accepted by Waddell & Reed, Inc. Each
purchase made from time to time under the Statement of Intention is treated as
if the purchaser were buying at one time the total amount which he or she
intends to invest. The sales charge applicable to all purchases of Class A
shares made under the terms of the Statement of Intention will be the sales
charge in effect on the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.
Example: H signs a Statement of Intention indicating his intent to invest
in his own name a dollar amount sufficient to entitle him to
purchase Class A shares at the sales charge applicable to a
purchase of $300,000. H has an UGMA account for his child and
the Class A shares held in the account have a net asset value as
of the date the Statement of Intention is accepted by Waddell &
Reed, Inc. of $50,000; H's wife, W, has an account in her own
name invested in another fund in the United Group which charges
the same sales load as the Fund, with a net asset value as of the
date of acceptance of the Statement of Intention of $75,000; H
needs to invest $175,000 in Class A shares over the 13-month
period in order to qualify for the reduced sales load applicable
to a purchase of $300,000.
A copy of the Statement of Intention signed by a purchaser will be
returned to the purchaser after it is accepted by Waddell & Reed, Inc. and will
set forth the dollar amount of Class A shares which must be purchased within the
13-month period in order to qualify for the reduced sales charge.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement of Intention. An amount
equal to 5% of the purchase required under the Statement of Intention will be
held "in escrow." If a purchaser does not, during the period covered by the
Statement of Intention, invest the amount required to qualify for the reduced
sales charge under the terms of the Statement of Intention, he or she will be
responsible for payment of the sales charge applicable to the amount actually
invested. The additional sales charge owed on purchases of Class A shares made
under a Statement of Intention which is not completed will be collected by
redeeming part of the shares purchased under
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<PAGE>
the Statement of Intention and held "in escrow" unless the purchaser makes
payment of this amount to Waddell & Reed, Inc. within 20 days of Waddell & Reed,
Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the Statement of Intention, the lower sales charge will
apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement of Intention.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement of Intention will be deducted in computing the aggregate purchases
under the Statement of Intention.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund in determining the applicable sales charge.
For these purposes, Class A shares of United Cash Management, Inc. that were
acquired by exchange of another United Group fund's Class A shares on which a
sales charge was paid, plus the shares paid as dividends on those acquired
shares, are also taken into account.
44
<PAGE>
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased
at net asset value by the Directors and officers of the Fund, employees of
Waddell & Reed, Inc., employees of their affiliates, account representatives of
Waddell & Reed, Inc. and the spouse, children, parents, children's spouses and
spouse's parents of each such Director, officer, employee and account
representative. "Child" includes stepchild; "parent" includes stepparent. Trusts
under which the grantor and the trustee or a co-trustee are each an eligible
purchaser are also eligible for net asset value purchases of Class A shares.
"Employees" includes retired employees. A retired employee is an individual
separated from service from Waddell & Reed, Inc. or affiliated companies with a
vested interest in any Employee Benefit Plan sponsored by Waddell & Reed, Inc.
or its affiliated companies. "Account representatives" includes retired account
representatives. A "retired account representative" is any account
representative who was, at the time of separation from service from Waddell &
Reed, Inc., a Senior Account Representative. A custodian under UGMA or UTMA
purchasing for the child or grandchild of any employee or account representative
may purchase Class A shares at net asset value whether or not the custodian
himself is an eligible purchaser.
Reasons for Differences in Public Offering Price of Class A Shares
As described herein and in the Prospectus for Class A shares, there are a
number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under a Statement of Intention or right of accumulation. See
the table of sales charges in the Prospectus. The reasons for these quantity
discounts are, in general, that (i) they are traditional and have long been
permitted in the industry and are therefore necessary to meet competition as to
sales of shares of other funds having such discounts, (ii) certain quantity
discounts are required by rules of the National Association of Securities
Dealers, Inc. (as are elimination of sales charges on the reinvestment of
dividends and distributions), and (iii) they are designed to avoid an unduly
large dollar amount of sales charge
45
<PAGE>
on substantial purchases in view of reduced selling expenses. Quantity discounts
are made available to certain related persons for reasons of family unity and to
provide a benefit to tax-exempt plans and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments of
redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted by the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing shareholders adversely
affected since, in each case, the Fund receives the net asset value per share of
all shares sold or issued.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is made
in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemption of shares of the Fund may be made
in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling such
securities. The Fund, however, has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which it is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder.
Flexible Withdrawal Service for Class A Shareholders
If you qualify, you may arrange to receive through the Flexible Withdrawal
Service (the "Service") regular monthly, quarterly, semiannual or annual
payments by redeeming on an ongoing basis Class A shares that you own of the
Fund or of any of the funds in the United Group. It would be a disadvantage to
46
<PAGE>
an investor to make additional purchases of shares while a withdrawal program is
in effect because it would result in duplication of sales charges. Applicable
forms to start the Service are available from Waddell & Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group; or,
you must own Class A shares having a value of at least $10,000. The value for
this purpose is the value at the offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-twelfth
of a percentage of the value of the shares in the account (you select the
percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is
to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for the
Service are paid in additional Class A shares. All payments under the Service
are made by redeeming Class A shares, which may involve a gain or loss for tax
purposes. To the extent that payments exceed dividends and distributions, the
number of Class A shares you own will decrease. When all of the shares in your
account are redeemed, you will not receive any further payments. Thus, the
payments are not an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. You
may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will
be sent to you to assist you in completing your Federal income tax return.
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<PAGE>
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
You may decide you would rather own Class A shares of one or more of the
other funds in the United Group rather than Class A shares of the Fund. An
exchange of Class A shares of the Fund may be made only if you have held the
shares for at least six months unless the exchange is for Class A shares of
United Government Securities Fund, Inc. or United Municipal High Income Fund,
Inc. or unless the Class A shares of the Fund were acquired by dividends or
distributions paid in shares, in which cases there is no holding period. You may
exchange for shares of another fund without payment of an additional sales
charge. You should ask for and read the prospectus for the fund into which you
are thinking of making an exchange before doing so.
Fund shares may be received in exchange for Class A shares of any of the
other funds in the United Group, except for shares of United Cash Management,
Inc. acquired by direct purchase or received in payment of dividends on those
shares.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of United Cash Management, Inc.
automatically exchanged each month into Class A shares of the Fund or any other
fund in the United Group. The shares of United Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100 or you must own
Class A shares of the fund in the United Group into which you want to exchange.
The minimum value of shares which you may designate for automatic exchange
monthly is $100, which may be allocated among the Class A or corresponding
shares of different funds in the United Group so long as each fund receives a
value of at least $25. Minimum initial investment and minimum balance
requirements apply to such automatic exchange service.
You may redeem your Class A shares of a Fund and use the proceeds to
purchase Class Y shares of that Fund if you meet the criteria for purchasing
Class Y shares.
Class Y Share Exchanges
Class Y shares of a Fund may be exchanged for Class Y shares of any other
fund in the United Group or Class A shares of United Cash Management, Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after the fund receives your exchange request in good
order.
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<PAGE>
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Reinvestment Privilege
The Prospectus for Class A shares discusses the reinvestment privilege for
Class A shares under which, if you redeem your Class A shares and then decide it
was not a good idea, you may reinvest. If Class A shares of the Fund are then
being offered, you can put all or part of your redemption payment back into
Class A shares of the Fund without any sales charge at the net asset value next
determined after you have returned the amount. Your written request to do this
must be received within 30 days after your redemption request was received. You
can do this only once as to Class A shares of the Fund. You do not use up this
privilege by redeeming Class A shares to invest the proceeds at net asset value
in a Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board has no intent to compel redemptions in the foreseeable future. If it
should elect to compel redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors is not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Vogel is a member of the Fund's Board of Directors. The other
persons are officers but not members of the Board of Directors. For purposes of
this section, the term "Fund Complex" includes each of the registered investment
companies in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. Each of the Fund's Directors is also a Director of
each of the other funds in
49
<PAGE>
the Fund Complex and each of its officers is also an officer of one or more of
the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell & Reed
Development, Inc., a business development company, and Waddell & Reed
Distributors, Inc.; formerly, President of the Fund and each of the other funds
in the Fund Complex; formerly, Vice Chairman of the Board of Directors of
Torchmark Corporation; formerly, Chairman of the Board of Directors of Waddell &
Reed Asset Management Company, a former affiliate of Waddell & Reed Financial,
Inc.; formerly, Director of Vesta Insurance Group, Inc.; formerly, Director of
Southwestern Life Corporation. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and Director
of Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores
Dori Eccles Foundation. Director of First Security Corp., a bank holding
company, and Director of Fluor Corp., a company with interests in coal. Date
of birth: March 24, 1933.
50
<PAGE>
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Daughter of Ronald K. Richey, Director of the
Fund and each of the other funds in the Fund Complex. Date of birth: July
29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at
the University of Oklahoma College of Law; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, an Attorney with
Crowe & Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES*
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Vice President, Chief
Operating Officer, Director and Treasurer of Waddell & Reed Financial Services,
Inc.; Executive Vice President, Principal Financial Officer, Director and
Treasurer of WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; President, Treasurer and Director
of Waddell & Reed Distributors, Inc.; President of Waddell & Reed Development,
Inc., a business development company; formerly, Vice President of the Fund and
each of the other funds in the Fund Complex; formerly, Director and Treasurer of
Waddell & Reed Asset Management Company. Date of birth: November 12, 1936.
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<PAGE>
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, Treasurer and Director of Waddell
& Reed Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; Director of Waddell & Reed Development, Inc., a business development
company. Formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company.
Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired. Formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company; formerly, Director
of Waddell & Reed Asset Management Company, Waddell & Reed Financial, Inc. and
United Investors Life Insurance Company, affiliates of Waddell & Reed, Inc. Date
of birth: April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3,
1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date
of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
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<PAGE>
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company. Date of birth: July 18, 1942.
John M. Holliday
Vice President of the Fund and eight other funds in the Fund Complex;
Senior Vice President of WRIMCO; formerly, Senior Vice President of Waddell &
Reed Asset Management Company; formerly, Senior Vice President of Waddell &
Reed, Inc. Date of birth: June 11, 1935.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of its manager,
WRIMCO, are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 70 and has served as a director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S.
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<PAGE>
Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500
for each meeting of the Board of Directors attended and $500 for each committee
meeting attended which is not in conjunction with a Board of Directors meeting,
other than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group,
Target/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size.
During the Fund's fiscal year ended September 30, 1998, the Fund's
Directors received the following fees for service as a director:
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A Tucker 0 0
James M. Concannon 2,588 56,000
John A. Dillingham 2,588 56,000
David P. Gardner 0 0
Linda K. Graves 2,588 56,000
Joseph Harroz, Jr. 0 0
John F. Hayes 2,588 56,000
Glendon E. Johnson 2,539 55,000
William T. Morgan 2,588 56,000
Ronald C. Reimer 0 0
Frank J. Ross, Jr. 2,588 56,000
Eleanor B. Schwartz 2,588 56,000
Frederick Vogel III 2,588 56,000
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Gardner was elected as a Director on August 19, 1998. Messrs.
Harroz, Hechler, Herrmann and Reimer were elected as Directors on November
18, 1998. The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1998, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. As of such date
no person owned of record or was known by the Fund to own beneficially 5% or
more of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are two sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than
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<PAGE>
payments when you redeem your shares. The first source is net investment income,
which is derived from the interest and earned discount on the securities the
Fund holds, less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from sales of securities at a price lower
than the Fund's basis therein; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The payments made to shareholders from net investment income and net
short-term capital gains are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gain, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses carried over from a prior year or years to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. You can change your instructions at any time. If you
give no instructions, your dividends and distributions will be paid in shares of
the Fund of the same class as that with respect to which they were paid. All
payments in Fund shares are at net asset value without any sales charge. The net
asset value used for this purpose is that computed as of the record date for the
dividend or distribution, although this could be changed by the Board of
Directors.
Even if you get dividends and distributions on Class A shares in cash, you
can thereafter reinvest them (or distributions only) in Class A shares of the
Fund at net asset value (i.e., with no sales charge) next determined after
receipt by Waddell & Reed, Inc. of the amount clearly identified as a
reinvestment. The reinvestment must be within 45 days after the payment.
TAXES
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), so
that it is relieved of Federal income tax on that part of its investment
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<PAGE>
company taxable income (consisting generally of taxable net investment income,
net short-term capital gains and net gains from certain foreign currency
transactions) that is distributed to its shareholders. To continue to qualify as
a RIC, the Fund must distribute to its shareholders for each taxable year at
least 90% of the sum of its investment company taxable income plus its net
interest income excludable from gross income under Section 103(a) of the Code
("Distribution Requirement"), and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures contracts or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
Securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities ("50% Diversification Requirement"); and
(3) at the close of each quarter of the Fund's taxable year, not more than 25%
of the value of its total assets may be invested in securities (other than U.S.
Government Securities or the securities of other RICs) of any one issuer.
Dividends paid by the Fund will qualify as "exempt-interest dividends,"
and thus will be excludable from shareholders' gross income, if the Fund
satisfies the additional requirement that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under section
103(a); the Fund intends to continue to satisfy this requirement. The aggregate
dividends excludable from all shareholders' gross income may not exceed the
Fund's net tax-exempt income. The Fund uses the average annual method to
determine the exempt income portion of each distribution, and the percentage of
income designated as tax-exempt for any particular distribution may be
substantially different from the percentage of the Fund's income that was
tax-exempt during the period covered by the distribution. The treatment of
dividends from the Fund under state and local income tax laws may differ from
the treatment thereof under the Code.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described above; they are only included in
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<PAGE>
the calculation of whether a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits. Moreover, if the Fund realizes capital gain
as a result of market transactions, any distribution of that gain will be
taxable to shareholders. There also may be collateral Federal income tax
consequences regarding the receipt of tax-exempt dividends by shareholders such
as S corporations, financial institutions and property and casualty insurance
companies. Any shareholder that falls into any of these categories should
consult its tax adviser concerning its investment in Fund shares.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year even if they are paid by the Fund
during the following January. Accordingly, those dividends and distributions
will be reported by, and (except for exempt-interest dividends) taxed to, the
shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any balance of the loss that is not disallowed will
be treated as long-term, instead of short-term, capital loss to the extent of
any distributions received on those shares. Investors also should be aware that
if shares are purchased shortly before the record date for a taxable dividend or
distribution, the investor will receive some portion of the purchase price back
as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary (taxable) income for that year and capital
gain net income for the one-year period ending on October 31 of that year, plus
certain other amounts. It is the Fund's policy to pay sufficient taxable
dividends and distributions each year to avoid imposition of the Excise Tax. The
Fund may defer into the next calendar year net capital losses incurred between
November 1 and the end of the current calendar year.
Income from Options and Futures Contracts
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the amount, character
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<PAGE>
and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Gains from options and futures contracts derived by the
Fund with respect to its business of investing in securities will qualify as
permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it receives also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund received will be added to the exercise price to
determine the gain or loss on the sale.
Certain options and futures contracts in which the Fund may invest may be
"section 1256 contracts." Section 1256 contracts held by the Fund at the end of
its taxable year, other than contracts subject to a "mixed straddle" election
made by the Fund, are "marked-to-market" (that is, treated as sold at that time
for their fair market value) for Federal income tax purposes, with the result
that unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gains or losses recognized on these deemed sales, and 60% of
any net realized gains or losses from any actual sales of section 1256
contracts, are treated as long-term capital gains or losses, and the balance is
treated as short-term capital gains or losses. That 60% portion will qualify for
the 20% (10% for taxpayers in the 15% marginal tax bracket) maximum tax rate on
net capital gains enacted by the Taxpayer Relief Act of 1997. Section 1256
contracts also may be marked-to-market for purposes of the Excise Tax and other
purposes. The Fund may need to distribute any mark-to-market gains to its
shareholders to satisfy the Distribution Requirement and/or avoid imposition of
the Excise Tax, even though it may not have closed the transactions and received
cash to pay the distributions.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. That section defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options and futures contracts are personal property. Section
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<PAGE>
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provide certain "wash sale" rules, that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures contract or short
sale) with respect to any debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the same or substantially similar
property, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract or
futures contract entered into by the Fund or a related person with respect to
the same or substantially similar property. In addition, if the appreciated
financial position is itself a short sale such a contract, acquisition of the
underlying property or substantially similar property will be deemed a
constructive sale.
Zero Coupon Securities
The Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As a holder of those securities, the Fund must account
for the OID that accrues on such tax-exempt securities, and must include in its
income the OID that accrues on such taxable securities during the taxable year,
even if the Fund receives no corresponding payment on the securities during the
year. Because the Fund annually must distribute substantially all of its
investment company taxable income and net income excludable from gross income
under section 103(a), including any accrued OID, to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax, it may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions will be made from
the Fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales, which
would increase or decrease its investment company taxable income and/or net
capital gain.
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<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Purchases are made directly from issuers or from underwriters, dealers
or banks. Purchases from underwriters include a commission or concession paid by
the issuer to the underwriter. Purchases from dealers will include the spread
between the bid and asked prices. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only if
it appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with similar
investment objectives. It can be anticipated that the manager will frequently
place concurrent orders for all or most of the accounts for which the manager
has responsibility or WRIMCO may otherwise combine orders for the Fund with
those of other funds in the United Group, Target/United Funds, Inc. and Waddell
& Reed Funds, Inc. or other accounts for which it has investment discretion.
Transactions effected pursuant to such combined orders are averaged as to price
and allocated in accordance with the purchase or sale orders actually placed for
each fund or advisory account, except where the combined order is not filled
completely. In this case, WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed. Sharing in large transactions could affect the
price the Fund pays or receives or the amount it buys or sells. However,
sometimes a better negotiated price is available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions or spreads, as applicable. The Fund has not effected
transactions through brokers and does not anticipate doing so. However, if
WRIMCO were to effect brokerage transactions, it need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to review
by the Board of Directors, such policies include the selection of brokers which
provide execution and/or research services and other services, including pricing
or quotation services directly or through others ("research and brokerage
services") considered by WRIMCO to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which WRIMCO has
investment discretion.
Research and brokerage services are, in general, defined by reference to
Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of
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<PAGE>
investing in, purchasing or selling securities and the availability of
securities and purchasers or sellers; (ii) furnishing analyses and reports; or
(iii) effecting securities transactions and performing functions incidental
thereto (such as clearance, settlement and custody). "Investment discretion" is,
in general, defined as having authorization to determine what securities shall
be purchased or sold for an account, or making those decisions even though
someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than another qualified broker would charge for
effecting comparable transactions if a good faith determination is made by
WRIMCO that the commission is reasonable in relation to the research or
brokerage services provided. Subject to the foregoing considerations, WRIMCO may
also consider sales of Fund shares as a factor in the selection of
broker-dealers to execute portfolio transactions. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO and investment research
received for the commissions of those other accounts may be useful both to the
Fund and one or more of such other accounts. To the extent that electronic or
other products provided by such brokers to assist WRIMCO in making investment
management decisions are used for administration or other non-research purposes,
a reasonable allocation of the cost of the product attributable to its
non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
request of a broker) includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make available additional views for consideration and comparisons; and enables
WRIMCO to obtain market information on the price of securities held in the
Fund's portfolio or being considered for purchase.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers two classes of shares: Class A and Class Y. Prior to
January 21, 1996, the Fund offered only one class of shares to the public.
Shares outstanding on that date were
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<PAGE>
designated as Class A shares. Each class represents an interest in the same
assets of the Fund and differ as follows: each class of shares has exclusive
voting rights on matters pertaining to matters appropriately limited to that
class; Class A shares are subject to an initial sales charge and to an ongoing
distribution and/or service fee and Class Y shares, which are designated for
institutional investors, have no sales charge nor ongoing distribution and/or
service fee; each class may bear differing amounts of certain class-specific
expenses; and each class has a separate exchange privilege. The Fund does not
anticipate that there will be any conflicts between the interests of holders of
the different classes of shares of the Fund by virtue of those classes. On an
ongoing basis, the Board of Directors will consider whether any such conflict
exists and, if so, take appropriate action. Each share of the Fund is entitled
to equal voting, dividend, liquidation and redemption rights, except that due to
the differing expenses borne by the two classes, dividends and liquidation
proceeds of Class A shares are expected to be lower than for Class Y shares of
the Fund. Each fractional share of a class has the same rights, in proportion,
as a full share of that class. Shares are fully paid and nonassessable when
purchased.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the bylaws are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at time which the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director when requested in writing to do so by the shareholders of record of not
less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
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<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities that
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their
meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in small degree.
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<PAGE>
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a
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<PAGE>
bankruptcy petition has been filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods. The D rating will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings)
are generally regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
MIS rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may
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<PAGE>
not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years
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<PAGE>
will most likely receive a long-term debt rating. The following criteria will be
used in making that assessment.
- --Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
- --Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings -- MIS ratings for state and municipal
short-term obligations will be designated Moody's Investment Grade (MIG). This
distinction is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of major
importance in bond risk are of lesser importance over the short run. Rating
symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security elements
are accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market. Ratings
are graded into several categories, ranging from "A-1" for the highest quality
obligations to D for
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<PAGE>
the lowest. Issuers rated A are further referred to by use
of numbers 1, 2 and 3 to indicate the relative degree of safety. Issues assigned
an A rating (the highest rating) are regarded as having the greatest capacity
for timely payment. An A-1 designation indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation. An
A-2 rating indicates that capacity for timely payment is satisfactory; however,
the relative degree of safety is not as high as for issues designated A-1.
Issues rated A-3 have adequate capacity for timely payment; however, they are
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. Issues rated B are regarded as
having only speculative capacity for timely payment. A C rating is assigned to
short-term debt obligations with a doubtful capacity for payment. Debt rated D
is in payment default, which occurs when interest payments or principal payments
are not made on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace
period.
MIS commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. MIS employs the designations of Prime 1, Prime 2 and
Prime 3, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers. Issuers rated Prime 1 have a superior capacity for
repayment of short-term promissory obligations and repayment capacity will
normally be evidenced by (1) lending market positions in well established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (5) well established access to a range of
financial markets and assured sources of alternate liquidity. Issuers rated
Prime 2 also have a strong capacity for repayment of short-term promissory
obligations as will normally be evidenced by many of the characteristics
described above for Prime 1 issuers, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation; capitalization
characteristics, while still appropriate, may be more affected by external
conditions; and ample alternate liquidity is maintained. Issuers rated Prime 3
have an acceptable capacity for repayment of short-term promissory obligations,
as will normally be evidenced by many of the characteristics above for Prime 1
issuers, but to a lesser degree. The effect of industry characteristics and
market composition may be more pronounced; variability in earnings and
profitability may result in changes in the level of debt protection measurements
and requirement for relatively high financial leverage; and adequate alternate
liquidity is maintained.
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<TABLE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS
ALASKA - 3.22%
City of Valdez, Alaska, Marine
Terminal Revenue Refunding Bonds
(BP Pipelines (Alaska) Inc. Project),
Series 1993A,
5.85%, 8-1-2025 ............................... $28,650 $ 30,046,687
Alaska Housing Finance Corporation,
Housing Development Bonds, 1997
Series B (AMT),
5.8%, 12-1-2029 ............................... 2,000 2,075,000
Total ......................................... 32,121,687
ARKANSAS - 0.32%
Arkansas Development Finance Authority,
Single Family Mortgage Revenue Bonds
(Access Program), 1995 Series F (AMT),
7.45%, 1-1-2027 ............................... 1,690 1,897,025
City of Gurdon, Arkansas, Pollution Control
Revenue Refunding Bonds,
1998 Series A (Non-AMT),
5.375%, 3-1-2020 .............................. 1,250 1,290,625
Total ......................................... 3,187,650
CALIFORNIA - 9.83%
California Statewide Communities Development
Authority:
Special Facilities Lease Revenue Bonds,
1997 Series A (United Air Lines, Inc.-San
Francisco International Airport Projects),
5.7%, 10-1-2033 ............................... 20,900 21,762,125
Hospital Revenue Certificates
of Participation, Series 1992,
Cedars-Sinai Medical Center,
6.5%, 8-1-2012 ................................ 5,200 6,084,000
Hospital Refunding Revenue Certificates of
Participation, Series 1993,
Cedars-Sinai Medical Center,
Inverse Floating Rate Securities (INFLOS),
7.068%, 11-1-2015 (A) ......................... 3,300 3,460,875
See Notes to Schedule of Investments on page .
71
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
East Bay Municipal Utility District,
Wastewater System Subordinated Revenue
Refunding Bonds, Series 1993B-2 (YCNs):
6.72%, 6-1-2013 (A) ........................... 8,450 $ 9,622,438
6.82%, 6-1-2020 (A) ........................... 7,250 8,056,562
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-2013 ................................ 12,000 15,240,000
Southern California Public Power Authority:
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-2012 ............................... 3,455 4,271,244
Mead-Adelanto Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ............................... 2,800 2,971,500
Mead-Phoenix Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ............................... 2,600 2,759,250
County of San Bernardino, California,
Certificates of Participation (1992 Justice
Center/Airport Improvements Refunding
Project), Inland Empire Public Facilities
Corporation, Short/RITES Certificates,
6.85%, 7-1-2016 (B) ........................... 9,500 9,986,875
California Rural Home Mortgage Finance
Authority, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities
Program):
1998 Series A,
5.75%, 12-1-2029 .............................. 3,500 3,928,750
1997 Series C,
6.75%, 3-1-2029 ............................... 2,050 2,372,875
1998 Series B,
5.75%, 12-1-2029 .............................. 2,000 2,235,000
See Notes to Schedule of Investments on page .
72
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
Delta Counties Home Mortgage Finance Authority,
Single Family Mortgage Revenue Bonds
(Mortgage-Backed Securities Program),
1998 Series A,
5.2%, 12-1-2014 ............................... $ 3,110 $ 3,199,412
Intermodal Container Transfer Facility,
Joint Powers Authority, Intermodal
Container Transfer Facility Refunding
Revenue Bonds, 1989 Series A,
7.7%, 11-1-2014 ............................... 2,000 2,072,500
Total ......................................... 98,023,406
COLORADO - 5.36%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991D,
7.75%, 11-15-2013 ............................. 11,905 15,268,163
Series 1992B,
7.25%, 11-15-2023 ............................. 11,990 13,353,862
Colorado Housing and Finance Authority:
Single Family Program Senior and Subordinate
Bonds:
1996 Series B-1,
7.65%, 11-1-2026 .............................. 2,750 3,114,375
1997 Series C-2,
6.875%, 11-1-2028 ............................. 2,500 2,809,375
1997 Series A-2,
7.25%, 5-1-2027 ............................... 2,000 2,297,500
1996 Series C-1,
7.55%, 11-1-2027 .............................. 1,580 1,797,250
1998 Series A-3,
6.5%, 5-1-2016 ................................ 1,000 1,115,000
Single Family Program Senior Bonds:
1996 Series A-1,
7.4%, 11-1-2027 ............................... 3,735 4,192,538
1995 Series D-1,
7.375%, 6-1-2026 .............................. 75 83,812
Colorado Student Obligation Bond Authority,
Student Loan Asset-Backed Obligations,
Senior Subordinate, 1995 Series II-B,
6.2%, 12-1-2008 ............................... 8,000 8,410,000
See Notes to Schedule of Investments on page .
73
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
COLORADO (Continued)
Highlands Ranch Metropolitan District No. 3,
Douglas County, Colorado,
General Obligation Bonds, Series 1998A,
5.125%, 12-1-2012 ............................. $ 1,000 $ 1,023,750
Total ......................................... 53,465,625
CONNECTICUT - 2.41%
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ................................ 13,750 13,990,625
Bristol Resource Recovery Facility,
Operating Committee, Solid Waste Revenue
Refunding Bonds (Ogden Martin Systems of
Bristol, Inc. Project--1995 Series),
6.5%, 7-1-2014 ................................ 7,000 7,805,000
Connecticut Development Authority, Water
Facilities Revenue Bonds (Bridgeport
Hydraulic Company Project-1995 Series),
6.15%, 4-1-2035 ............................... 2,000 2,200,000
Total ......................................... 23,995,625
FLORIDA - 1.56%
Escambia County, Florida, Pollution Control
Revenue Bonds (Champion International
Corporation Project), Series 1996,
6.4%, 9-1-2030 ................................ 6,200 6,796,750
Pasco County, Florida, Solid Waste Disposal
and Resource Recovery System, Revenue
Bonds, Series 1998 (AMT),
6.0%, 4-1-2011 ................................ 4,930 5,583,225
Housing Finance Authority of Lee County, Florida,
Single Family Mortgage Revenue Bonds,
Series 1998A, Subseries 6,
6.45%, 3-1-2031 ............................... 2,800 3,136,000
Total ......................................... 15,515,975
GEORGIA - 3.05%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-2013 ................................ 15,500 18,464,375
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-2011 ............................... 8,700 11,908,125
Total ......................................... 30,372,500
See Notes to Schedule of Investments on page .
74
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
HAWAII - 2.45%
State of Hawaii, Airports System Revenue
Bonds, Second Series of 1991,
6.9%, 7-1-2012 ................................ $20,195 $ 24,435,950
IDAHO - 0.75%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating Rate Securities,
8.25%, 2-15-2021 (A) .......................... 6,000 7,470,000
ILLINOIS - 1.72% City of Chicago:
Collateralized Single Family Mortgage Revenue Bonds:
Series 1998C-1,
6.3%, 9-1-2029 ................................ 4,000 4,380,000
Series 1998A-1,
6.45%, 9-1-2029 ............................... 2,500 2,768,750
Series 1997-B,
6.95%, 9-1-2028 ............................... 1,890 2,142,788
Chicago-O'Hare International Airport, General Airport
Revenue Refunding Bonds, 1993 Series A,
5.0%, 1-1-2012 ................................ 3,000 3,116,250
Illinois Health Facilities Authority,
Revenue Bonds, Series 1997 (Victory
Health Services),
5.375%, 8-15-2016 ............................. 3,000 3,048,750
City of Peoria, City of Moline and City
of Freeport, Illinois, Collateralized
Single Family Mortgage Revenue Bonds,
Series 1995-A,
7.6%, 4-1-2027 ................................ 1,490 1,679,975
Total ......................................... 17,136,513
INDIANA - 6.04%
Indianapolis Airport Authority,
Special Facility Revenue Bonds, Series 1995 A
(United Air Lines, Inc., Indianapolis
Maintenance Center Project),
6.5%, 11-15-2031 .............................. 18,850 20,546,500
See Notes to Schedule of Investments on page .
75
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
INDIANA (Continued)
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building
I Facility),
7.4%, 7-1-2015 ................................ $ 8,000 $ 10,470,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-2015 ................................ 4,775 6,249,281
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-2015 ............................... 9,000 11,643,750
East Chicago Elementary School Building
Corporation (Lake County, Indiana), First
Mortgage Refunding Bonds, Series 1996,
6.25%, 1-5-2016 ............................... 7,655 8,908,506
Indiana Health Facility Financing Authority,
Hospital Revenue Refunding Bonds, Series 1992
(The Methodist Hospitals, Inc.),
6.75%, 9-15-2009 .............................. 2,200 2,403,500
Total ......................................... 60,221,537
KANSAS - 1.43%
Sedgwick County, Kansas and Shawnee County, Kansas, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities Program):
1998 Series A-1 (AMT),
5.5%, 12-1-2022 ............................... 8,000 8,830,000
1997 Series A-1 (AMT),
5.5%, 6-1-2029 ................................ 4,775 5,449,469
Total ......................................... 14,279,469
KENTUCKY - 0.47%
Kentucky Economic Development Finance
Authority, Hospital Revenue Bonds,
Baptist Healthcare System Issue,
Series 1994,
5.0%, 8-15-2015 ............................... 4,650 4,702,313
See Notes to Schedule of Investments on page .
76
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
LOUISIANA - 2.73%
Louisiana Public Facilities Authority:
Hospital Revenue and Refunding Bonds:
St. Francis Medical Center Project,
Residual Interest Bonds (RIBS), Series 1994C,
6.797%, 7-22-2024 (A) ......................... $ 7,150 $ 8,374,437
Pendleton Memorial Methodist Hospital
Project, Series 1998,
5.25%, 6-1-2017 ............................... 2,000 1,950,000
Hospital Revenue Bonds,
Franciscan Missionaries of Our Lady Health
System Project, Series 1998C,
5.0%, 7-1-2019 ................................ 2,250 2,252,813
Parish of Jefferson Home Mortgage Authority,
Tax-Exempt Agency Mortgage-Backed
Securities, Series 1994A,
7.55%, 12-1-2026 .............................. 5,495 6,923,700
City of Shreveport, State of Louisiana,
Airport System PFC Revenue Bonds, Series
1997B (AMT-Subject),
5.0%, 1-1-2015 ................................ 3,165 3,192,694
Parish of East Baton Rouge, State of
Louisiana, Refunding Revenue Bonds
(Georgia-Pacific Corporation Project),
Series 1998,
5.35%, 9-1-2011 ............................... 3,000 3,037,500
Parish of Webster, Louisiana, Pollution
Control Revenue Refunding Bonds,
1998 Series B (non-AMT),
5.2%, 3-1-2013 ................................ 1,435 1,490,606
Total ......................................... 27,221,750
MASSACHUSETTS - 1.56%
Massachusetts Housing Finance Agency,
Single Family Housing Revenue Bonds,
Series 57 (AMT),
5.6%, 6-1-2030 ................................ 5,000 5,168,750
Massachusetts Port Authority, Revenue
Refunding Bonds, Series 1998-B (AMT),
5.0%, 7-1-2016 ................................ 3,560 3,577,800
Massachusetts Municipal Wholesale Electric
Company, A Public Corporation of the
Commonwealth of Massachusetts, Power
Supply System Revenue Bonds, 1993 Series A,
Inverse Floating Rate Security (INFLOS),
6.966%, 7-1-2018 (A) .......................... 2,500 2,734,375
See Notes to Schedule of Investments on page .
77
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MASSACHUSETTS (Continued)
Massachusetts State College Building
Authority, Project and Refunding
Revenue Bonds, Senior Series 1994-A,
7.5%, 5-1-2014 ................................ $ 1,750 $ 2,316,562
Boston Water and Sewer Commission,
General Revenue Bonds, 1992 Series A
(Senior Series),
5.75%, 11-1-2013 .............................. 1,575 1,767,937
Total ......................................... 15,565,424
MICHIGAN - 3.06%
City of Detroit, Michigan, Sewage Disposal
System Revenue and Revenue Refunding Bonds,
Series 1993-A, Inverse Floating Rate Security
(INFLOS),
7.618%, 7-1-2023 (A) .......................... 11,200 12,656,000
Michigan Strategic Fund, Limited Obligation
Refunding Revenue Bonds (The Detroit Edison
Company Pollution Control Bonds Project),
Collateralized Series 1991 AA,
6.95%, 5-1-2011 ............................... 8,000 10,030,000
Michigan State Hospital Finance Authority:
Hospital Revenue and Refunding Bonds
(Bay Medical Center), Series 1997A,
5.375%, 7-1-2011 .............................. 2,190 2,332,350
Hospital Revenue Bonds (The Detroit Medical
Center Obligated Group), Series 1998A,
5.125%, 8-15-2018 ............................. 2,000 1,967,500
Charter County of Wayne, Michigan, Detroit
Metropolitan Wayne County Airport, Airport
Revenue Bonds:
Series 1998A,
5.0%, 12-1-2019 ............................... 2,000 2,002,500
Subordinate Lien, Series 1993B,
5.25%, 12-1-2013 .............................. 1,500 1,550,625
Total ......................................... 30,538,975
MINNESOTA - 0.75%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Floating Inverse
Rate Securities (FIRS),
7.4%, 11-15-2009 (A) .......................... 4,500 5,377,500
See Notes to Schedule of Investments on page .
78
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MINNESOTA (Continued)
HealthSystem Minnesota, The Healthcare
Network, City of St. Louis Park,
Minnesota, Health Care Facilities Revenue
Bonds (HealthSystem Minnesota Obligated
Group), Series 1993,
Relinked Inverse Floater,
5.1%, 7-1-2013 (A)............................. $ 2,000 $ 2,052,500
Total ......................................... 7,430,000
MISSISSIPPI - 2.27%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B, Indexed
Inverse Floating/Fixed Term Bonds,
8.25%, 4-1-2022 (A) ........................... 11,000 13,598,750
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-2014 ............................... 5,500 5,802,500
6.7%, 9-1-2012 ................................ 1,470 1,550,850
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1996F (AMT),
7.55%, 12-1-2027 .............................. 1,490 1,700,462
Total ......................................... 22,652,562
MISSOURI - 3.26%
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series C,
7.25%, 9-1-2026 ............................... 2,985 3,373,050
1997 Series C-1 (Non-AMT),
6.55%, 9-1-2028 ............................... 1,980 2,217,600
1996 Series C,
7.45%, 9-1-2027 ............................... 1,570 1,813,350
1998 Series D-2 (AMT),
6.3%, 3-1-2029 ................................ 1,150 1,275,063
1998 Series B-2 (AMT),
6.4%, 3-1-2029 ................................ 1,000 1,101,250
1997 Series A-2,
7.3%, 3-1-2028 ................................ 925 1,063,750
See Notes to Schedule of Investments on page .
79
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
Health and Educational Facilities Authority
of the State of Missouri, Health Facilities
Revenue Bonds:
BJC Health System, Series 1994A,
6.75%, 5-15-2012 .............................. $ 4,000 $ 4,845,000
Freeman Health System Project, ....Series 1998,
5.25%, 2-15-2018 .............................. 2,460 2,484,600
Lake of the Ozarks General Hospital, Inc.,
Series 1998,
5.1%, 2-15-2018 ............................... 2,220 2,242,200
Health Facilities Revenue Bonds
(Barnes-Jewish, Inc./Christian Health
Services), Series 1993A:
6.0%, 5-15-2011 ............................... 3,000 3,393,750
5.25%, 5-15-2014 .............................. 2,900 3,070,375
Poplar Bluff, Missouri, Public Building Corporation,
Leasehold Refunding and Improvement Revenue Bonds
(Poplar Bluff, Missouri), Series 1998,
5.1%, 9-1-2018 ................................ 2,000 2,027,500
City of Fenton, Missouri, Public Facilties
Authority, Leasehold Revenue Bonds,
Series 1997 (City of Fenton, Missouri,
Lessee),
5.25%, 1-1-2018 ............................... 2,000 2,022,500
Missouri Higher Education Loan Authority
(A Public Instrumentality and Body
Corporate and Politic of the State of
Missouri), Student Loan Revenue Bonds,
Subordinate Series 1994A,
5.45%, 2-15-2009 .............................. 1,500 1,522,500
Total ......................................... 32,452,488
NEBRASKA - 1.61%
Nebraska Higher Education Loan Program, Inc.,
1993-2 Series A-6 Junior Subordinate Bonds,
6.4%, 6-1-2013 ................................ 14,500 16,004,375
NEVADA - 0.32%
Nevada Housing Division, Single Family
Mortgage Bonds:
1998 Series A-1 Mezzanine Bonds,
5.35%, 4-1-2016 ............................... 2,050 2,083,313
1996 Series C Subordinate Bonds,
6.35%, 4-1-2009 ............................... 985 1,063,800
Total ......................................... 3,147,113
See Notes to Schedule of Investments on page .
80
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NEW JERSEY - 0.75%
The Hudson County Improvement Authority,
Essential Purpose Pooled Governmental
Loan Program Bonds, Series 1986,
7.6%, 8-1-2025 ................................ $ 5,080 $ 5,492,750
The Union County Utilities Authority
(Union County, New Jersey), Solid Waste
Facility Senior Lease Revenue Bonds
(Ogden Martin Systems of Union, Inc.
Lessee - Series 1998 A),
5.0%, 6-1-2015 ................................ 2,000 2,030,000
Total ......................................... 7,522,750
NEW MEXICO - 3.19%
New Mexico Educational Assistance Foundation:
Student Loan Program Bonds:
First Subordinate 1995 Series A-2:
5.95%, 11-1-2007 .............................. 2,740 $ 2,873,575
5.85%, 11-1-2006 .............................. 1,575 1,645,875
Second Subordinate 1996 Series A-3,
6.75%, 11-1-2008 .............................. 2,175 2,373,469
First Subordinate 1996 Series A-2,
6.2%, 11-1-2008 ............................... 2,210 2,323,262
Second Subordinate 1995 Series A-3,
6.6%, 11-1-2010 ............................... 1,415 1,469,831
Student Loan Purchase Bonds,
Senior 1995 Series IV-A1 (AMT),
7.05%, 3-1-2010 ............................... 5,310 5,761,350
City of Albuquerque, New Mexico, Governmental Purpose
Airport Refunding Revenue Bonds, Series 1989,
6.5%, 7-1-2019 ................................ 15,350 15,350,000
Total ......................................... 31,797,362
NEW YORK - 6.48%
Mental Health Services ..Facilities Improvement
Revenue Bonds, 1993 Series F Refunding,
5.375%, 2-15-2014 ............................. 12,000 12,465,000
New York State Medical Care Facilities Finance Agency:
Hospital Insured Mortgage Revenue Bonds,
1994 Series A Refunding,
5.25%, 8-15-2014 .............................. 10,000 10,362,500
See Notes to Schedule of Investments on page .
81
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
Dormitory Authority of the State of New York:
City University System Consolidated Revenue
Bonds, Series 1993F,
5.0%, 7-1-2014 ................................ $ 9,700 $ 9,748,500
City University System Consolidated Third General
Resolution Revenue Bonds, 1998 Series 1,
5.0%, 7-1-2016 ................................ 3,000 3,048,750
State University Educational Facilities,
Revenue Bonds, Series 1990B,
7.5%, 5-15-2011 ............................... 2,000 2,490,000
Department of Health of the State of
New York, Revenue Bonds, Series 1996,
5.5%, 7-1-2010 ................................ 2,000 2,152,500
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-2013 ............................... 1,000 1,096,250
The City of New York, General Obligation Bonds:
Fiscal 1997 Series H,
6.125%, 8-1-2025 .............................. 5,730 6,303,000
Fiscal 1994 Series C, Inverse Floaters,
20.36%, 9-30-2003 (C) ......................... 3,250 5,074,063
Housing New York Corporation, Senior
Revenue Refunding Bonds, Series 1993,
5.0%, 11-1-2013 ............................... 6,600 6,616,500
New York State Urban Development Corporation:
Correctional Capital Facilities Revenue Bonds,
1993A Refunding Series,
5.25%, 1-1-2014 ............................... 3,000 3,240,000
Correctional Facilities Service Contract
Revenue Bonds, Series A,
5.0%, 1-1-2013 ................................ 2,000 2,035,000
Total ......................................... 64,632,063
NORTH CAROLINA - 1.78%
North Carolina Medical Care Commission,
Hospital Revenue Bonds:
Rex Healthcare, Series 1998,
5.0%, 6-1-2017 ................................ 7,850 7,928,500
Gaston Health Care, Series 1998,
5.0%, 2-15-2019 ............................... 2,500 2,478,125
Halifax Regional Medical Center, Series 1998,
5.0%, 8-15-2018 ............................... 2,170 2,102,187
Columbus County Industrial (The),
Facilities and Pollution Control Financing
Authority (North Carolina), Environmental
Improvement Revenue Bonds, 1996 Series A,
5.85%, 12-1-2020 .............................. 5,000 5,250,000
Total ......................................... 17,758,812
See Notes to Schedule of Investments on page .
82
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NORTH DAKOTA - 0.71%
City of Fargo, North Dakota, Health System
Revenue Bonds (Meritcare Obligated Group),
Series 1996A,
5.55%, 6-1-2016 ............................... 5,350 $ 5,711,125
State of North Dakota, North Dakota Housing
Finance Agency, Housing Finance Program Bonds,
Home Mortgage Finance Program, 1998 Series A,
5.25%, 7-1-2018 ............................... 1,390 1,412,588
Total ......................................... 7,123,713
OHIO - 0.62%
County of Erie, Ohio, Franciscan Services
Corporation, Revenue Refunding Bonds,
Series 1993 A (Providence Hospital, Inc.),
6.0%, 1-1-2013 ................................ 4,000 4,255,000
City of Moraine, Ohio, Solid Waste
Disposal Revenue Bonds (General Motors
Corporation Project), Series 1994,
6.75%, 7-1-2014 ............................... 1,550 1,904,562
Total ......................................... 6,159,562
OKLAHOMA - 0.73%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series B, Subseries B-2 (AMT),
7.625%, 9-1-2026 .............................. $ 5,450 6,172,125
1996 Series A,
7.05%, 9-1-2026 ............................... 1,000 1,126,250
Total ......................................... 7,298,375
OREGON - 0.27%
State of Oregon, Housing and Community
Services Department, Mortgage Revenue
Bonds, Single-Family Mortgage Program:
1992 Series B,
6.875%, 7-1-2028 .............................. 2,500 2,678,125
1992 Series C,
5.5%, 7-1-2013 ................................ 35 35,000
Total ......................................... 2,713,125
See Notes to Schedule of Investments on page .
83
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
PENNSYLVANIA - 2.94%
City of Philadelphia, Pennsylvania, Water
and Wastewater Revenue Bonds, Series 1993,
Inverse Rate Securities,
7.23%, 6-15-2012 (A) .......................... $11,750 $ 13,262,812
Delaware Valley Regional Finance Authority
(Bucks, Chester, Delaware and Montgomery Counties,
Pennsylvania), Local Government Revenue Bonds,
1997 Series B,
5.6%, 7-1-2017 ................................ 5,000 5,537,500
County of Allegheny, Pennsylvania, Airport
Revenue Refunding Bonds,
Series 1997A-1 (AMT),
5.75%, 1-1-2012 ............................... 4,000 4,455,000
Delaware County Authority, Hospital Revenue
Bonds, Series of 1992 (Riddle Memorial
Hospital),
6.5%, 1-1-2022 ................................ 2,800 3,073,000
Philadelphia Authority for Industrial Development,
Philadelphia, Pennsylvania, Airport Revenue
Bonds, Series 1998A (Philadelphia Airport
System Project),
5.0%, 7-1-2015 ................................ 3,000 3,030,000
Total ......................................... 29,358,312
PUERTO RICO - 1.27%
Puerto Rico Public Buildings Authority,
Public Education and Health Facilities,
Refunding Bonds, Series M,
5.7%, 7-1-2016 ................................ 12,000 12,630,000
SOUTH CAROLINA - 1.80%
South Carolina Jobs - Economic Development
Authority, Hospital Revenue Refunding and
Improvement Bonds (South Carolina Baptist
Hospital), Series 1993D, Intermediate Longs,
7.07%, 8-1-2021 ............................... 14,550 15,859,500
Orangeburg County, South Carolina, Solid
Waste Disposal Facilities Revenue Bonds
(South Carolina Electric & Gas Company
Project), Series 1994,
5.7%, 11-1-2024 ............................... 2,000 2,082,500
Total ......................................... 17,942,000
See Notes to Schedule of Investments on page .
84
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
TENNESSEE - 0.92%
The Health and Educational Facilities Board
of the Metropolitan Government of Nashville
and Davidson County, Tennessee:
Health Facility Revenue Refunding Bonds (Open
Arms Developmental Centers Project), Series 1998,
5.1%, 8-1-2016 ................................ $ 2,745 $ 2,758,725
Multi-Modal Interchangeable Rate, Health Facility
Revenue Bonds (Richland Place, Inc. Project),
Series 1993,
5.5%, 5-1-2023 ................................ 1,990 2,091,988
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-2008 .............................. 2,700 2,757,375
Memphis-Shelby County Airport Authority,
Special Facilities Revenue Bonds,
Refunding Series 1997 (Federal Express
Corporation),
5.35%, 9-1-2012 ............................... 1,500 1,580,625
Total ......................................... 9,188,713
TEXAS - 4.84%
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-2011 ............................... 14,300 17,231,500
Texas Department of Housing and Community
Affairs, Single Family Mortgage Revenue
Bonds:
1997 Series A (AMT) TEAMS Structure,
5.8%, 9-1-2029 ................................ 5,000 5,225,000
1997 Series D (AMT) TEAMS Structure:
5.65%, 3-1-2029 ............................... 2,500 2,590,625
5.7%, 9-1-2029 ................................ 1,500 1,554,375
Amarillo Health Facilities Corporation,
Hospital Revenue Bonds (Baptist St. Anthony's
Hospital Corporation Project), Series 1998,
5.5%, 1-1-2015 ................................ 6,320 6,880,900
Lubbock Health Facilities Development
Corporation, Hospital Revenue Bonds
(Methodist Hospital, Lubbock, Texas
Project), Series 1993B,
6.75%, 12-1-2010 .............................. 5,000 6,125,000
See Notes to Schedule of Investments on page .
85
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-2028 ............................. $ 3,220 $ 3,570,175
City of Houston, Texas, Airport System
Special Facilities Revenue Bonds
(Continental Airlines, Inc. Terminal
Improvement Projects), Series 1997B,
6.125%, 7-15-2017 ............................. 2,850 2,981,813
Midland County Hospital District, Hospital
Revenue Refunding Bonds, Series 1997,
5.375%, 6-1-2016 .............................. 2,000 2,072,500
Total ......................................... 48,231,888
UTAH - 3.32%
Intermountain Power Agency, Power Supply
Revenue Refunding Bonds, 1993 Series A,
Inverse Floating Rate Securities (INFLOS),
7.266%, 7-1-2021 (A) .......................... 18,200 19,724,250
Tooele County, Utah, Hazardous Waste Treatment
Revenue Bonds (Union Pacific Corporation/
USPCI, Inc. Project), Series A,
5.7%, 11-1-2026 ............................... 13,200 13,365,000
Total ......................................... 33,089,250
WASHINGTON - 8.77%
Washington Public Power Supply System:
Nuclear Project No. 3, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-2016 .............................. 20,750 26,119,063
Series 1993C,
6.77%, 7-1-2012 ............................... 7,000 7,621,250
Nuclear Project No. 1, Refunding Revenue Bonds:
Series 1997B:
5.125%, 7-1-2013 .............................. 10,000 10,225,000
5.125%, 7-1-2015 .............................. 5,000 5,131,250
Series 1989B,
7.125%, 7-1-2016 .............................. 8,200 10,321,750
Series 1998A,
5.0%, 7-1-2013 ................................ 2,000 2,025,000
Nuclear Project No. 2 Refunding Revenue
Bonds, Series 1994A:
Inverse Floating Rate Securities,
7.47%, 7-1-2011 (A) ........................... 7,500 9,300,000
Linked Inverse Floating Rate Securities,
5.4%, 7-1-2012 ................................ 5,000 5,400,000
See Notes to Schedule of Investments on page .
86
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
WASHINGTON (Continued)
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-2015 ............................... $ 4,995 $ 6,200,044
Public Utility District No. 1 of Douglas
County, Washington, Wells Hydroelectric
Revenue Bonds, Series of 1965,
3.7%, 9-1-2018 ................................ 4,200 4,037,250
Housing Authority of the City of Seattle,
Low-Income Housing Assistance Revenue Bonds,
1995 (GNMA Collateralized Mortgage
Loan - Kin On Project),
7.4%, 11-20-2036 .............................. 875 1,029,219
Total ......................................... 87,409,826
WISCONSIN - 0.61%
Wisconsin Public Power Incorporated SYSTEM (The),
Power Supply System Revenue Bonds,
Series 1993B-2, Yield Curve Notes (YCNs),
6.95%, 7-1-2014 (A) ........................... 5,500 6,084,375
WEST VIRGINIA - 0.39%
Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), Series 1995A,
6.5%, 4-1-2025 ................................ 3,500 3,863,125
TOTAL MUNICIPAL BONDS - 93.56% $932,744,188
(Cost: $850,689,274)
TOTAL SHORT-TERM SECURITIES - 3.19% $ 31,791,313
(Cost: $31,791,313)
TOTAL INVESTMENT SECURITIES - 96.75% $964,535,501
(Cost: $882,480,587)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 3.25% 32,353,371
NET ASSETS - 100.00% $996,888,872
</TABLE>
See Notes to Schedule of Investments on page .
87
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Notes to Schedule of Investments
(A) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at September 30, 1998.
(B) The interest rate is subject to change periodically and based upon
prevailing market rates. The interest rate shown is the rate in effect at
September 30, 1998.
(C) The interest rate is subject to change periodically and based upon
prevailing market rates with a leverage factor of three. The interest rate
shown is the rate in effect at September 30, 1998.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
88
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
(In Thousands, Except for Per Share Amounts)
<TABLE>
<S> <C>
Assets
Investment securities--at value
(Notes 1 and 3) ........................................ $ 964,536
Receivables:
Investment securities sold ............................. 22,511
Interest ............................................... 14,244
Fund shares sold ....................................... 544
Prepaid insurance premium ................................ 29
----------
Total assets ......................................... 1,001,864
----------
Liabilities
Payable to Fund shareholders ............................. 2,630
Payable for investment securities purchased .............. 2,080
Accrued service fee (Note 2) ............................. 177
Accrued transfer agency and dividend
disbursing (Note 2) .................................... 60
Accrued management fee (Note 2) .......................... 12
Accrued accounting services fee (Note 2) ................. 7
Distribution fee (Note 2) ................................ 1
Due to custodian ......................................... 1
Other .................................................. 7
----------
Total liabilities ...................................... 4,975
----------
Total net assets ................................... $ 996,889
==========
Net Assets
$1.00 par value capital stock, authorized --
600,000; shares outstanding - 130,689
Capital stock .......................................... $ 130,689
Additional paid-in capital ............................. 772,825
Accumulated undistributed income:
Accumulated undistributed net investment
income ............................................... 1,427
Accumulated undistributed net realized gain on
investment transactions .............................. 9,893
Net unrealized appreciation in value of
investments .......................................... 82,055
----------
Net assets applicable to outstanding units
of capital ......................................... $ 996,889
==========
Net asset value per share (net assets divided by
shares outstanding) ...................................... $7.63
=====
</TABLE>
See notes to financial statements.
89
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1998
(In Thousands)
<TABLE>
<S> <C>
Investment Income
Interest and amortization (Note 1B) ......................... $55,883
-------
Expenses (Note 2):
Investment management fee ................................. 4,183
Service fee ............................................... 1,900
Transfer agency and dividend disbursing ................... 670
Accounting services fee ................................... 86
Custodian fees ............................................ 44
Audit fees ................................................ 20
Distribution fees ......................................... 10
Legal fees ................................................ 9
Other ..................................................... 157
-------
Total expenses .......................................... 7,079
-------
Net investment income ................................. 48,804
-------
Realized and Unrealized Gain on
Investments (Notes 1 and 3)
Realized net gain on securities ............................. 20,753
Realized net loss on put options purchased .................. (4,234)
Realized net gain on futures contracts closed ............... 422
-------
Net realized gain on investments .......................... 16,941
Net unrealized appreciation in value of
investments during the period ............................. 16,492
-------
Net gain on investments ................................. 33,433
-------
Net increase in net assets resulting
from operations ...................................... $82,237
=======
</TABLE>
See notes to financial statements.
90
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year
ended September 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income...................... $ 48,804 $ 50,228
Realized net gain on
investments ............................. 16,941 9,662
Unrealized appreciation ................... 16,492 31,319
-------- --------
Net increase in net assets
resulting from operations ............. 82,237 91,209
-------- --------
Distributions to shareholders from(Note 1D):*
Net investment income: .................... (48,648) (49,761)
Realized gains on securities
transactions: ........................... (12,104) (20,845)
-------- --------
(60,752) (70,606)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
(41,023,912 and 69,698,111
shares, respectively) ................... 307,508 511,770
Proceeds from reinvestment of
dividends and/or capital gains
distribution: (6,763,886 and
8,113,114 shares, respectively) ......... 50,042 58,978
Payments for shares redeemed:
(50,159,643 and 80,867,185
shares, respectively) ................... (376,023) (594,413)
--------- --------
Net decrease in net
assets resulting from capital
share transactions .................... (18,473) (23,665)
--------- --------
Total increase (decrease) ............. 3,012 (3,062)
Net Assets
Beginning of period ......................... 993,877 996,939
--------- --------
End of period, including
undistributed net investment
income of $1,427 and
$1,271, respectively ...................... $996,889 $993,877
======== ========
</TABLE>
*See "Financial Highlights" on page .
See notes to financial statements.
91
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended
September 30,
-----------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period... $7.47 $7.32 $7.25 $6.91 $7.83
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ............. 0.37 0.38 0.39 0.39 0.38
Net realized and
unrealized gain
(loss) on
investments ........ 0.25 0.30 0.12 0.38 (0.67)
----- ----- ----- ----- -----
Total from investment
operations ........... 0.62 0.68 0.51 0.77 (0.29)
----- ----- ----- ----- -----
Less distributions:
From net investment
income ............. (0.37) (0.37) (0.39) (0.39) (0.38)
From capital gains ... (0.09) (0.16) (0.05) (0.00) (0.25)
In excess of capital
gains .............. (0.00) (0.00) (0.00) (0.04) (0.00)
----- ----- ----- ----- -----
Total distributions .... (0.46) (0.53) (0.44) (0.43) (0.63)
----- ----- ----- ----- -----
Net asset value,
end of period ........ $7.63 $7.47 $7.32 $7.25 $6.91
===== ===== ===== ===== =====
Total return* .......... 8.67% 9.77% 7.16% 11.51% -3.91%
Net assets, end of
period (in
millions) ............ $997 $994 $997 $975 $951
Ratio of expenses to
average net assets.... 0.72% 0.67% 0.68% 0.65% 0.64%
Ratio of net investment
income to average
net assets ........... 4.95% 5.14% 5.23% 5.51% 5.17%
Portfolio
turnover rate ........ 50.65% 47.24% 74.97% 70.67% 62.61%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
92
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 -- Significant Accounting Policies
United Municipal Bond Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to provide income not subject to Federal
income taxation. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Municipal bonds and the taxable obligations in the
Fund's investment portfolio are not listed or traded on any securities
exchange. Therefore, municipal bonds are valued using a pricing system
provided by a pricing service or dealer in bonds. Short-term debt
securities, whether taxable or nontaxable, are valued at amortized cost,
which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Securities gains and losses are calculated on
the identified cost basis. Original issue discount (as defined in the
Internal Revenue Code) and premiums on the purchase of bonds are
amortized for both financial and tax reporting purposes over the
remaining lives of the bonds. Interest income is recorded on the
accrual basis. See Note 3 -- Investment Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. The Fund intends to pay distributions as
required to avoid imposition of excise tax. Accordingly, provision has
not been made for Federal income taxes. In addition, the Fund intends
to meet requirements of the Internal Revenue Code which will permit it
to pay dividends from net investment income, substantially all of which
will be exempt from Federal income tax. See Note 4 -- Federal Income
Tax Matters.
D. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by the Fund on the record date. Net
investment income dividends and capital gains distributions are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
due to differing treatments for items such as deferral of wash sales
and post-October losses, net operating losses and expiring capital loss
carryovers.
E. Futures -- See Note 5 -- Futures.
F. Options -- See Note 6 -- Options.
93
<PAGE>
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .03% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $18.9 billion of
combined net assets at September 30, 1998) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
<TABLE>
<CAPTION>
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.3125 for each shareholder account which
was in existence at any time during the prior month, plus $0.30 for each account
on which a dividend or distribution of cash or shares had a record date in that
month. The Fund also reimburses W&R and WARSCO for certain out-of-pocket costs.
94
<PAGE>
As principal underwriter for the Fund's shares, W&R received gross sales
commissions (which are not an expense of the Fund) of $1,153,458, out of which
W&R paid sales commissions of $663,988 and all expenses in connection with the
sale of Fund shares, except for registration fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $35,405, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $487,150,153 while proceeds from maturities
and sales aggregated $581,245,455. Purchases of options aggregated $5,409,385
while proceeds from options aggregated $2,903,135. Purchases of short-term
securities aggregated $1,018,059,216 while proceeds from maturities and sales
aggregated $989,228,207. No U.S. Government securities were bought or sold
during the period ended September 30, 1998.
For Federal income tax purposes, cost of investments owned at September
30, 1998 was $886,920,070, resulting in net unrealized appreciation of
$77,615,431, of which $77,619,034 related to appreciated securities and $3,603
related to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $15,978,789 during its fiscal year ended September 30, 1998, of which a
portion was paid to shareholders during the period ended September 30, 1998.
Remaining net capital gains will be distributed to the Fund's shareholders.
NOTE 5 -- Futures
The Fund may engage in buying and selling interest rate futures contracts,
but only Debt Futures and Municipal Bond Index Futures. Upon entering into a
futures contract, the Fund is required to deposit, in a segregated account, an
amount of cash or U.S. Treasury Bills equal to a varying specified percentage of
the contract amount. This amount is known as the initial margin. Subsequent
payments ("variation margins") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying debt security
or index. These changes in the variation margins are recorded by the Fund as
unrealized gains or losses. Upon the closing
95
<PAGE>
of the contracts, the cumulative net change in the variation margin is recorded
as realized gain or loss. The Fund uses futures to attempt to reduce the overall
risk of its investments.
NOTE 6 -- Options
Options purchased by the Fund are accounted for in the same manner as
marketable portfolio securities. The cost of portfolio securities acquired
through the exercise of call options is increased by the premium paid to
purchase the call. The proceeds from securities sold through the exercise of put
options are decreased by the premium paid to purchase the put. The Fund uses
options to attempt to reduce the overall risk of its investments.
NOTE 7 -- Multiclass Operations
On January 21, 1996, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class A shares represent existing shareholders; Class Y
shares are offered through a separate Prospectus to certain institutional
investors. Class Y shares are not subject to a sales charge on purchases; they
are not subject to a Rule 12b-1 Distribution and Service Plan and have a
separate transfer agency and dividend disbursement services fee structure. As of
September 30, 1998, the Fund had not commenced multiclass operations.
96
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Municipal Bond Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Municipal Bond Fund, Inc. (the "Fund") as
of September 30, 1998, and the related statements of operations for the fiscal
year then ended and changes in net assets for each of the fiscal years in the
two-year period then ended, and the financial highlights for each of the fiscal
years in the five-year period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Municipal
Bond Fund, Inc. as of September 30, 1998, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
97
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
22. Financial Statements
--------------------
(a) Financial Statements -- United Municipal Bond Fund, Inc.
Included in Part B:
-------------------
As of September 30, 1998
Statements of Assets and Liabilities
For the year ended September 30, 1998
Statements of Operations
For the two years ended September 30, 1998
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of September 30, 1998
Report of Independent Accountants
<PAGE>
23. Exhibits
--------
(a) Articles of Incorporation, filed November 17, 1995 as
EX-99.B1-charter to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
Articles Supplementary filed November 17, 1995 as EX-99.B1-mbartsup
to Post-Effective Amendment No. 35 to the Registration Statement on
Form N-1A*
(b) By-Laws, as amended, filed December 27, 1996 as EX-99.B2-mbbylaw to
Post-Effective Amendment No. 36 to the Registration Statement on
Form N-1A*
(c) Not applicable
(d) Investment Management Agreement filed November 17, 1995 as
EX-99.B5-mbima to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
Assignment to the Investment Management Agreement filed November 17,
1995 as EX-99.B5-mbassign to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
(e) Underwriting Agreement filed November 17, 1995 as EX-99.B6-mbua to
Post-Effective Amendment No. 35 to the Registration Statement on
Form N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, attached hereto as EX-99.B8-mbca
(h) Shareholder Servicing Agreement attached hereto as EX-99.B9-mbssa
Accounting Services Agreement filed November 17, 1995 as
EX-99.B9-mbasa to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
Service Agreement filed by electronic format on July 30, 1993 as
Exhibit (b)(15) to Post-Effective Amendment No. 32 to the
Registration Statement on Form N-1A*
Amendment to Service Agreement filed December 29, 1994 as
EX-99.B9(d)mbsaa to Post-Effective Amendment No. 34 to the
Registration Statement on Form N-1A*
Amendment to Service Agreement filed November 17, 1995 as
EX-99.B9-mbappsaa to Post-Effective Amendment No. 37 to the
Registration Statement on Form N1-A*
Fund Class A Application, as amended, filed May 30, 1997 as
EX-99.B9-mbappca to Post-Effective Amendment No. 37 to the
Registration Statement on Form N1-A*
Fund Class Y Application filed November 17, 1995 as EX-99.B9-mbappcy
to Post-Effective Amendment No. 35 to the Registration Statement on
Form N-1A*
<PAGE>
Fund NAV Application filed November 17, 1995 as EX-99.B9-mbnavapp to
Post-Effective Amendment No. 35 to the Registration Statement on
Form N-1A*
Class Y letter of understanding filed December 27, 1996 as
EX-99.B9-mblou to Post-Effective Amendment No. 36 to the
Registration Statement on Form N-1A*
(i) Not applicable
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B11-mbconsnt
(k) Not applicable
(l) Not applicable
(m) Service Plan for Class A Shares filed November 17, 1995 as
EX-99.B15-mbspca to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
Distribution and Service Plan for Class A shares filed December 29,
1997 as EX-99.B15-mbdsp to Post-Effective Amendment No. 38 to the
Registration Statement on Form N1-A*
(n) Financial Data Schedule attached hereto as EX-27.B17-mbfds
(o) Multiple Class Plan filed November 17, 1995 as EX-99.B18-mbmcp to
Post-Effective Amendment No. 35 to the Registration Statement on
Form N-1A*
24. Persons controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Article SEVENTH paragraph 6(b) through (f) of the
Articles of Incorporation attached hereto as EX-99.B1-charter and to
Article IV of the Underwriting Agreement filed November 17, 1995 as
EX-99.B6-mbua to Post-Effective Amendment No. 35 to the Registration
Statement on Form N-1A*, both of which provide indemnification. Also refer
to Section 2-418 of the Maryland General Corporation Law regarding
indemnification of directors, officers, employees and agents.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is
to provide investment management services to the
<PAGE>
Registrant. Waddell & Reed, Inc. assigned its investment management duties
under this agreement to Waddell & Reed Investment Management Company on
January 8, 1992. Waddell & Reed Investment Management Company is not
engaged in any business other than the provision of investment management
services to those registered investment companies described in Part A and
Part B of this Post-Effective Amendment and to other investment advisory
clients.
Each director and executive officer of Waddell & Reed Investment
Management Company has had as his sole business, profession, vocation or
employment during the past two years only his duties as an executive
officer and/or employee of Waddell & Reed Investment Management Company or
its predecessors, except as to persons who are directors and/or officers
of the Registrant and have served in the capacities shown in the Statement
of Additional Information of the Registrant.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter of the Registrant.
It is also the principal underwriter to the following investment
companies:
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
Advantage I
Advantage II
Advantage Plus
Waddell & Reed Funds, Inc.
(b) The information contained in the underwriter's application on form
BD, under the Securities Exchange Act of 1934, is herein
incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
<PAGE>
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each
of whose business address is Post Office Box 29217, Shawnee Mission,
Kansas 66201-9217.
29. Management Services
-------------------
There is no service contract other than as discussed in Part A and Part B
of this Post-Effective Amendment and as listed in response to Item 23.
30. Undertakings
------------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(a) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Overland Park, and State of Kansas, on the 1st day of
December, 1998.
UNITED MUNICIPAL BOND FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/Keith A. Tucker* Chairman of the Board December 1, 1998
- ---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal December 1, 1998
- ---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and December 1, 1998
- ---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer December 1, 1998
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director December 1, 1998
- ---------------------- ----------------
James M. Concannon
/s/John A. Dillingham* Director December 1, 1998
- ---------------------- ----------------
John A. Dillingham
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/David P. Gardner* Director December 1, 1998
- ---------------------- ----------------
David P. Gardner
/s/Linda K. Graves* Director December 1, 1998
- ---------------------- ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director December 1, 1998
- ---------------------- ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director December 1, 1998
- ---------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director December 1, 1998
- ---------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 1, 1998
- ---------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director December 1, 1998
- ---------------------- ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director December 1, 1998
- ---------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 1, 1998
- ---------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 1, 1998
- ---------------------- ----------------
Frederick Vogel III
</TABLE>
*By
Kristen A. Richards
Attorney-in-Fact
ATTEST:
David R. Burford
Assistant Secretary
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
FUNDS, INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND,
INC., UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TARGET/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, and KRISTEN A. RICHARDS, and each of them individually, their true and
lawful attorneys and agents to take any and all action and execute any and all
instruments which said attorneys and agents may deem necessary or advisable to
enable each Corporation to comply with the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and any rules, regulations, orders
or other requirements of the United States Securities and Exchange Commission
thereunder, in connection with the registration under the Securities Act of 1933
and/or the Investment Company Act of 1940, as amended, including specifically,
but without limitation of the foregoing, power and authority to sign the names
of each of such directors and officers in his/her behalf as such director or
officer as indicated below opposite his/her signature hereto, to any
Registration Statement and to any amendment or supplement to the Registration
Statement filed with the Securities and Exchange Commission under the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and to any
instruments or documents filed or to be filed as a part of or in connection with
such Registration Statement or amendment or supplement thereto; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
Date: November 18, 1998 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
<TABLE>
<S> <C> <C>
/s/Keith A. Tucker Chairman of the Board November 18, 1998
- ---------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal November 18, 1998
- ---------------------- Financial Officer and -----------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and November 18, 1998
- ---------------------- Director -----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer November 18, 1998
- ----------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/James M. Concannon Director November 18, 1998
- ---------------------- -----------------
James M. Concannon
/s/John A. Dillingham Director November 18, 1998
- ---------------------- -----------------
John A. Dillingham
/s/David P. Gardner Director November 18, 1998
- ---------------------- -----------------
David P. Gardner
/s/Linda K. Graves Director November 18, 1998
- ---------------------- -----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director November 18, 1998
- ---------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director November 18, 1998
- ---------------------- -----------------
John F. Hayes
/s/Glendon E. Johnson Director November 18, 1998
- ---------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan Director November 18, 1998
- ---------------------- -----------------
William T. Morgan
/s/Ronald C. Reimer Director November 18, 1998
- ---------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director November 18, 1998
- ---------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director November 18, 1998
- ---------------------- -----------------
Eleanor B. Schwartz
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Frederick Vogel III Director November 18, 1998
- ---------------------- -----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
- ----------------------
Kristen A. Richards
Assistant Secretary
</TABLE>
EX-99.B8-mbca
CUSTODIAN AGREEMENT
Dated as of November 26, 1991
Amended and Restated as of May 13, 1998
Between
UMB BANK, n.a.
and
UNITED MUNICIPAL BOND FUND, INC.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
<S> <C>
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public
Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions
and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IV. Subcustodians
<S> <C>
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality; Survival of Obligations
Appendix "B"
</TABLE>
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 26th day of November, 1991 between United
Municipal Bond Fund, Inc. (the "Fund") and UMB Bank, n.a., formerly, United
Missouri Bank, n.a. (the "Custodian") and as amended and restated as of May 13,
1998.
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on behalf
of the Fund in accordance with the provisions of the Investment Company Act of
1940, as amended (the "1940 Act") and the rules and regulations thereunder,
under the terms and conditions set forth in this Agreement, and the Custodian
has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to
be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and duties
set forth in this Article II. Pursuant to and in accordance with Article IV
hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and keep
safely the Assets in accordance with the terms and conditions hereof on behalf
of the Fund.
Section 2.02. Manner of Holding Securities.
<PAGE>
(a) The Custodian shall at all times hold securities of the Fund either:
(i) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form; or (ii) in book-entry
form by a Securities System (as hereinafter defined) in accordance with the
provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the Fund
in the name of the Fund or the Fund's nominee, or in the nominee name of the
Custodian unless specifically directed by Proper Instructions (as hereinafter
defined) to hold such registered securities in so-called street name; provided
that, in any event, all Assets shall be held in an account of the Custodian
containing only assets of the Fund. Notwithstanding the foregoing, unless it
receives Proper Instructions to the contrary, the Custodian shall register all
securities in the name of the Custodian's nominee as authorized by the Fund. All
securities held directly or indirectly by the Custodian hereunder shall at all
times be identifiable on the records of the Custodian. Except as otherwise
provided herein, the Custodian shall keep the Assets physically segregated from
those of other persons or entities. The Custodian shall execute and deliver all
certificates and documents in connection with registration of securities as may
be required by the applicable provisions of the Internal Revenue Code, the laws
of any State or territory of the United States and the laws of any jurisdiction
in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the Custodian
shall pay for and receive securities purchased for the account of the Fund,
provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the
<PAGE>
settlement occurs, but in all events subject to the standard of care set forth
in Article V hereof. For purposes of this Agreement, an "Institutional Client"
shall mean a major commercial bank, corporation, insurance company, or
substantially similar institution, which, as a substantial part of its business
operations, purchases or sells securities and makes use of custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
<PAGE>
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , as "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such securities in the
name of the Custodian or a nominee of the Custodian, for delivery to the
Custodian at such place as the Custodian may from time to time designate. Upon
receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer
thereof, against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depository to
deliver the securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
<PAGE>
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the
broker-dealer shall be responsible for determining the sufficiency of assets
held in any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option (including stock index options), then as
part of the transaction, the Custodian, the Fund and the broker-dealer shall
have entered into a tri-party agreement, as described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions, or
pursuant to the provisions of any futures margin procedural agreement among the
Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this
<PAGE>
Agreement and in accordance with Proper Instructions, and shall be liable for
performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall be responsible for the collection of income as set forth in Section 2.15
and the transmission of cash and instructions to and from such accounts; and (b)
the Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and
<PAGE>
direct pursuant to Proper Instructions. The Fund accepts full responsibility for
its use of third party foreign exchange brokers (any dealer other than the
Foreign Subcustodian) (as hereinafter defined) and for execution of said foreign
exchange contracts and understands that the Fund shall be responsible for any
and all costs and interest charges which may be incurred as a result of the
failure or delay of its third party broker to deliver foreign exchange unless
such loss, damage, or expense is caused by, or results from the negligence,
misfeasance or misconduct of the Custodian. Notwithstanding the foregoing, the
Custodian shall be responsible for the transmission of cash and instructions to
and from the currency broker or Banking Institution with which the contract or
option is made, the safekeeping of all certificates and other documents and
agreements evidencing or relating to such foreign exchange transactions and the
maintenance of proper records as set forth in Section 2.25. The Custodian shall
have no duty with respect to the selection of the currency brokers or Banking
Institutions with which the Fund deals or, so long as the Custodian acts in
accordance with Proper Instructions, for the failure of such brokers or Banking
Institutions to comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper
<PAGE>
Instructions. Upon receipt of Proper Instructions and the loaned securities, the
Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due
and payable to the Fund with respect to portfolio securities and other Assets;
(b) promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian shall
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio securities or other Assets is not received by the Custodian
when due. The Custodian shall not be responsible for the collection of amounts
due and payable with respect to portfolio securities or other Assets that are in
default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the Fund
to pay dividends or other distributions to shareholders of the Fund and to make
payment to shareholders who have requested repurchase or redemption of their
shares of the Fund (collectively, the "Shares"), the Custodian shall promptly
release cash or securities (a) in the case of cash, upon receipt of Proper
Instructions, to one or more Distribution Accounts (as hereinafter defined)
designated by the Fund in such Proper Instructions; or (b) in the case of
securities, upon the receipt of Special Instructions (as hereinafter defined) to
such entity or account designated by the Fund in such Special Instructions. For
purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive funds
representing cash payments received for Shares issued or sold from time to time
by the Fund, and shall promptly credit such funds to the account of the Fund.
The Custodian shall promptly notify the Fund of Custodian's receipt of cash in
payment for Shares issued by the Fund by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing. Upon receipt of Proper
Instructions, the Custodian shall: (a) deliver all federal funds received by the
Custodian in payment for Shares in payment for such investments as may be set
forth in such Proper Instructions and at a time agreed upon between the
Custodian and the Fund; and (b) make federal funds available to the Fund as of
specified times agreed upon from time to time by the Fund and the Custodian, in
the
<PAGE>
amount of checks received in payment for Shares which are deposited to the
accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or cause
to be delivered to the Fund, in the most expeditious manner practicable, all
forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to
all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the Custodian
shall take such action as the Fund deems necessary or appropriate to cause each
deposit account established by the Custodian pursuant to this Section 2.21 to be
insured to the maximum extent possible by all applicable deposit insurers,
including, without limitation, the Federal Deposit Insurance Corporation.
<PAGE>
Section 2.22. Deposit of Fund Assets in Securities Systems. The Custodian
may deposit and/or maintain domestic securities owned by the Fund in: (a) The
Depository Trust Company; (b) the Participants Trust Company; (c) any book-entry
system as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115
(ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2,
or (iii) the book-entry regulations of federal agencies substantially in the
form of 31 CFR 306.115; or (d) any other domestic clearing agency registered
with the Securities and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of
the Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
<PAGE>
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate
the use of any Securities System (except the federal book-entry system) on
behalf of the Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the securities of the Fund maintained with
such Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions, the
Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of Proper
Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall provide
any assistance reasonably requested by the Fund in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature. The Custodian shall maintain complete and accurate records with
respect to securities and other Assets held for the accounts of the Fund as
required by the rules and regulations of the SEC applicable to investment
companies registered under the 1940 Act, including, but not limited to: (a)
journals or other records of original entry containing a detailed and itemized
daily record of all receipts and deliveries of securities (including certificate
and transaction identification numbers, if any), and all receipts and
disbursements of cash; (b) ledgers or other records reflecting (i) securities in
transfer,
<PAGE>
(ii) securities in physical possession, (iii) securities borrowed, loaned or
collateralizing obligations of the Fund, (iv) monies borrowed and monies loaned
(together with a record of the collateral therefor and substitutions of such
collateral), and (v) dividends and interest received; and (c) cancelled checks
and bank records relating thereto. The Custodian shall keep such other books and
records of the Fund as the Fund shall reasonably request. All such books and
records maintained by the Custodian shall be maintained in a form acceptable to
the Fund and in compliance with the rules and regulations of the SEC, including,
but not limited to, books and records required to be maintained by Section 31(a)
of the 1940 Act and the rules and regulations from time to time adopted
thereunder. All books and records maintained by the Custodian pursuant to this
Agreement shall at all times be the property of the Fund and shall be available
during normal business hours for inspection and use by the Fund and its agents,
including without limitation, its independent certified public accountants.
Notwithstanding the preceding sentence, the Funds shall not take any actions or
cause the Custodian to take any actions which would knowingly cause, either
directly or indirectly, the Custodian to violate any applicable laws,
regulations or orders. Notwithstanding the provisions of this Section 2.25, in
the event the Fund purchases cash, securities and other Assets requiring the use
of a Domestic Subcustodian or Foreign Sub-Subcustodian, the Custodian shall be
entitled to rely upon and use the books, records and accountings of the Domestic
Subcustodian as its means of accounting to the Fund for all cash, securities and
other Assets deposited with such entities; provided however, that such books,
records and accountings on which the Bank may rely must be maintained in the
United States by such Domestic Subcustodian and, provided further, that any
agreement between the Custodian and such Domestic Subcustodian must state that
the Domestic Subcustodian agrees to make any records available upon request and
preserve, for the periods described in Rule 31a-2 of the 1940 Act, the records
required to be maintained by Rule 31a-1 of the 1940 Act. In no event shall the
Custodian be entitled to rely upon and use books, records and accountings which
are maintained outside of the United States.
Section 2.26. Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as the Fund may request to obtain
from year to year favorable opinions from the Fund's independent certified
public accountants with respect to the Custodian's activities hereunder in
connection with the preparation of the Fund's Form N-1A and the Fund's Form
N-SAR or other periodic reports to the SEC and with respect to any other
requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At the
request of the Fund, the Custodian shall deliver to the Fund a written report
prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian.
<PAGE>
Such report shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Fund and as may reasonably be obtained by the
Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
("Overdraft Notice") of any Overdraft by facsimile transmission or in such other
manner as the Fund and the Custodian may agree in writing. The Custodian shall
have a right of set-off against all Assets (except for Assets held in a
segregated margin account or otherwise pledged in connection with options or
futures contracts held for the benefit of the Fund and for Assets allocated to
any other Overdraft or loan made hereunder); provided, however, the Custodian
shall promptly notify the Fund in writing of any intent to exercise a right of
set-off against Assets hereunder and shall not exercise any such right of
set-off against Assets hereunder unless and until the Fund has failed to pay
(within ten (10) days after the Fund's receipt of such notice of intent to
exercise a right of set-off), any Overdraft, together with all accrued interest
thereon. Notwithstanding the provisions of any applicable law, including,
without limitation, the Uniform Commercial Code, the only rights or remedies
which the Custodian is entitled to with respect to Overdrafts is the right of
set-off granted herein.
<PAGE>
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special Instructions"
shall mean Proper Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of the Fund or any other person designated
by the Treasurer of the Fund in writing, which countersignature or confirmation
shall be (i) included on the same instrument containing the Proper Instructions
or on a separate instrument relating thereto, and (ii) delivered by hand, by
facsimile transmission or in such other manner as the Fund and the Custodian
agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of this
Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund
<PAGE>
(collectively, the "Authorized Persons" and individually, an "Authorized
Person"); and (b) the names, titles and signatures of those persons authorized
to issue Special Instructions. Such certificate may be accepted and relied upon
by the Custodian as conclusive evidence of the facts set forth therein and shall
be considered to be in full force and effect until delivery to the Custodian of
a similar certificate to the contrary. Upon delivery of a certificate which
deletes or does not include the name(s) of a person previously authorized to
give Proper Instructions or to issue Special Instructions, such persons shall no
longer be considered an Authorized Person or authorized to issue Special
Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-
<PAGE>
Subcustodian or Interim Sub-Subcustodian (as each are hereinafter defined) in
accordance with this Article IV; provided that the Fund's board also has
approved the agreement between the Custodian and the Foreign Custody Manager
specifying the Foreign Custody Manager's duties ("Delegation Agreement"). For
purposes of this Agreement, all Domestic Subcustodians, Special Subcustodians,
Foreign Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to
collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time and
from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940
Act or any trust company or other entity any of which meet requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any proposed Domestic Subcustodian
at least sixty (60) days prior to the desired appointment of such Domestic
Subcustodian, and the Fund will notify the Custodian, in writing signed by two
or more Authorized Persons, of approval or disapproval of the appointment of the
proposed Domestic Subcustodian; and provided, further, that the Custodian may
not appoint any such Domestic Subcustodian without such prior written approval
of the Fund by such Authorized Persons. Each such duly approved Domestic
Subcustodian and the countries where, Foreign Sub-Subcustodians and the
securities depositories and clearing agencies through which they may hold
securities and other Assets of the Fund shall be as agreed upon by the parties
hereto in writing, from time to time, in accordance with the provisions of
Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. Provided that the Custodian of a Domestic
Subcustodian is an Approved Foreign Custody Manager, the Custodian or any such
Domestic Subcustodian, as applicable, may appoint any (1)(a) "Qualified Foreign
Bank" (as such term is defined in Rule 17f-5) meeting the requirements of an
"Eligible Foreign Custodian" (as such term is defined in Rule 17f-5) or by SEC
order exempt therefrom; (b) majority-owned direct or indirect subsidiary of a
"U.S. bank" (as such term is defined in Rule 17f-5) or bank holding company
meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order
therefrom; or (c) any bank (as such term is defined in Section 2(a)(5) of the
1940 Act) meeting the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder (each a "Foreign
Sub-Subcustodian") or (2) any "Securities Depository" (as such term is defined
in Rule 17f-5) or clearing agency meeting the requirements of an Eligible
Foreign Custodian or exempt by SEC order therefrom ("Securities Depositories and
Clearing Agencies"), provided that the Foreign Custody Manager's appointments of
<PAGE>
such Eligible Foreign Custodians shall at all times be governed by the
Delegation Agreement.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the event
that the Fund shall invest in a security or other Asset to be held in a country
in which the Foreign Custody Manager has not appointed an Eligible Foreign
Custodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian shall agree in writing of the unavailability of
an approved Foreign Sub-Subcustodian in such country; and upon the receipt of
Special Instructions, the Custodian shall, or shall cause the Domestic
Subcustodian to, appoint or approve any Person (as hereinafter defined)
designated by the Fund in such Special Instructions, to hold such security or
other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to
this Section 4.02(b) is hereinafter referred to as an "Interim
Sub-Subcustodian.")
Section 4.03. Special Subcustodians. Upon receipt of Special Instructions,
the Custodian shall, on behalf of the Fund, appoint one or more banks, trust
companies or other entities designated in such Special Instructions to act as a
subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i) cause
each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian
or Interim Sub-Subcustodian. In the event that the Custodian is unable to cause
such subcustodian or sub-subcustodian to fully perform its obligations
thereunder, the Custodian shall promptly notify the Fund in writing and
forthwith, upon the receipt of Special Instructions, terminate or cause the
termination of such Subcustodian or Sub-Subcustodian with respect to the Fund
and, if necessary or desirable, appoint or cause
<PAGE>
the appointment of a replacement Subcustodian or Sub-Subcustodian in accordance
with the provisions of this Article IV. In addition to the foregoing, the
Custodian (A) may, at any time in its discretion, upon written notification to
the Fund, terminate any Domestic Subcustodian which is not an approved Foreign
Custody Manager, and (B) shall, upon receipt of Special Instructions, terminate
any Special Subcustodian or Domestic Subcustodian which is an Approved Foreign
Custody Manager with respect to the Fund, in accordance with the termination
provisions under the applicable subcustodian agreement, and (C) shall, upon
receipt of Special Instructions, cause the Domestic Subcustodian to terminate
any Foreign Sub-Subcustodian or Interim Sub-Subcustodian as to its use of such
entities with respect to the Fund, in accordance with the termination provisions
under the applicable sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Sub-Subcustodian then acting on behalf
of the Custodian; (ii) the countries in which and the Securities Depositories
and Clearing Agents through which each such Foreign Sub-Subcustodian is then
holding cash, securities and other Assets of the Fund; and (iii) such other
information as may be requested by the Fund to ensure compliance with rules and
regulations under the 1940 Act.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable care
and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); or (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian.
<PAGE>
(c) Mitigation by Custodian. Upon the occurrence of any event which causes
or may cause any loss, damage or expense to the Fund, (i) the Custodian shall,
(ii) the Custodian shall cause any applicable Domestic Subcustodian or Foreign
Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts to cause
any applicable Interim Sub-Subcustodian or Special Subcustodian to, use all
commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
<PAGE>
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the Custodian
for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (as hereinafter defined) or where any Person maintaining
securities, currencies, deposits or other Assets of the Fund in connection with
any such transactions has exercised reasonable care maintaining such property or
in connection with any such transaction involving such Assets. A "Sovereign
Risk" shall mean nationalization, expropriation, devaluation, revaluation,
confiscation, seizure, cancellation, destruction or similar action by any
governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority
<PAGE>
of currency restrictions, exchange controls, taxes, levies or other charges
affecting the Fund's property; or acts of war, terrorism, insurrection or
revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not be
liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of
<PAGE>
any such loss, damage or expense, if and to the extent that the Fund has not
been made whole for any such loss, expense or damage. If the Custodian makes the
Fund whole for any such loss, expense or damage, the Custodian shall retain the
ability to enforce its rights directly against such Subcustodian, Securities
System or other Person. Upon the Fund's election to enforce any rights of the
Custodian under this Section 5.05, the Fund shall reasonably prosecute all
actions and proceedings directly relating to the rights of the Custodian in
respect of the loss, damage or expense incurred by the Fund; provided that, so
long as the Fund has acknowledged in writing its obligation to indemnify the
Custodian under Section 5.03 hereof with respect to such claim, the Fund shall
retain the right to settle, compromise and/or terminate any action or proceeding
in respect of the loss, damage or expense incurred by the Fund without the
Custodian's consent and provided further, that if the Fund has not made an
acknowledgement of its obligation to indemnify, the Fund shall not settle,
compromise or terminate any such action or proceeding without the written
consent of the Custodian, which consent shall not be unreasonably withheld or
delayed. The Custodian agrees to cooperate with the Fund and take all actions
reasonably requested by the Fund in connection with the Fund's enforcement of
any rights of the Custodian. Nothing contained in this Section 5.05 shall be
construed as an obligation of the Fund to enforce the Custodian's rights. The
Fund agrees to reimburse the Custodian for out-of-pocket expenses incurred by it
in connection with the fulfillment of its obligations under this Section 5.05;
provided, however, that such reimbursement shall not apply to expenses
occasioned by or resulting from the negligence, misfeasance or misconduct of the
Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms or conditions of this Agreement or arising
out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall not
be liable for indemnification under this Section 5.06 unless the Fund shall have
promptly notified the Custodian in writing of the commencement of any litigation
or proceeding brought against the Fund in respect of which indemnity may be
sought under this Section 5.06. With respect to claims in such litigation or
proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the
Custodian shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Custodian may be subject to an indemnification
obligation; provided,
<PAGE>
however, the Fund shall be entitled to participate in (but not control) at its
own cost and expense, the defense of any such litigation or proceeding if the
Custodian has not acknowledged in writing its obligation to indemnify the Fund
with respect to such litigation or proceeding. If the Custodian is not permitted
to participate or control such litigation or proceeding under applicable law or
by a ruling of a court of competent jurisdiction, or if the Custodian chooses
not to so participate, the Fund shall not consent to the entry of any judgement
or enter into any settlement in any such litigation or proceeding without
providing the Custodian with adequate notice of any such settlement or
judgement, and without the Custodian's prior written consent which consent shall
not be unreasonably withheld or delayed. The Fund shall submit written evidence
to the Custodian with respect to any cost or expense for which it is seeking
indemnification in such form and detail as the Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to
the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an obligation
of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse
the Fund for out-of-pocket expenses incurred by it in connection with the
fulfillment of its obligations under this Section 5.07; provided, however, that
such reimbursement shall not apply to expenses occasioned by or resulting from
the negligence, misfeasance or misconduct of the Fund.
<PAGE>
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of this
Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "B" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first to
occur of: (a) termination by the Custodian by an instrument in writing delivered
or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
ARTICLE VIII
DEFINED TERMS
<PAGE>
The following terms are defined in the following sections:
<TABLE>
<S> <C>
Term Section
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
</TABLE>
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and deliver
to the Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement, provided that the exercise
by the Custodian or any Subcustodian of any such rights shall in all events be
in compliance with the terms of this Agreement.
<PAGE>
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby represents
and warrants that each of the following shall be true, correct and complete as
of the date of execution of this Agreement and, unless notice to the contrary is
provided by the Fund to the Custodian, at all times during the term of this
Agreement: (i) the Fund is duly organized under the laws of its jurisdiction of
organization and is registered as an open-end management investment company
under the 1940 Act or is a series of portfolio of such entity; and (ii) the
execution, delivery and performance by the Fund of this Agreement are (w) within
its power, (x) have been duly authorized by all necessary action, and (y) will
not (A) contribute to or result in a breach of or default under or conflict with
any existing law, order, regulation or ruling of any governmental or regulatory
agency or authority, or (B) violate any provision of the Fund's corporate
charter or other organizational document, or bylaws, or any amendment thereof or
any provision of its most recent Prospectus or Statement of Additional
Information.
(b) Representations and Warranties of the Custodian. The Custodian hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Custodian to the Fund, at all times during the term
of this Agreement: (i) the Custodian is duly organized under the laws of its
jurisdiction of organization and qualifies to serve as a custodian to open-end
management investment companies under the provisions of the 1940 Act; and (ii)
the execution, delivery and performance by the Custodian of this Agreement are
(w) within its power (x) have been duly authorized by all necessary action, and
(y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the
Custodian's corporate charter, or other organizational document, or bylaws, or
any amendment thereof. The Custodian acknowledges receipt of a copy of the
Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
<PAGE>
Section 9.04. Waivers and Amendments. No provisions of this Agreement may
be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which are
included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or
Special Instructions, and as otherwise provided in this Agreement, notices and
other writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
United Municipal Bond Fund, Inc.
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7764
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
<PAGE>
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
Section 9.11. Confidentiality; Survival of Obligations. The parties hereto
agree that each shall treat confidentially the terms and conditions of this
Agreement and all information provided by each party to the other regarding its
business and operations. All confidential information provided by a party hereto
shall be used by any other party hereto solely for the purpose of rendering
services pursuant to this Agreement and, except as may be required in carrying
out this Agreement, shall not be disclosed to any third party without the prior
consent of such providing party. The foregoing shall not be applicable to any
information that is publicly available when provided or thereafter becomes
publicly available other than through a breach of this Agreement, or that is
required to be disclosed by any bank examiner of the Custodian or any
Subcustodians, any auditor or examiner of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation. The
provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28, Section
3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and any other
rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
UNITED MUNICIPAL BOND FUND, INC. UMB BANK, n.a.
By: /s/Sharon K. Pappas By: /s/Ralph Santoro
---------------------------- ---------------------------
Name: Sharon K. Pappas Name: Ralph Santoro
Title: Vice President Title: Senior Vice President
<PAGE>
APPENDIX "B"
TO
CUSTODIAN AGREEMENT
BETWEEN
UNITED MUNICIPAL BOND FUND, INC.
AND
UMB BANK, N.A.
Dated as of May 1, 1997
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets held
in the United States including but not limited to American Depositary Receipts.
Foreign assets shall include all assets held outside the United States including
but not limited to securities which clear through Euroclear or CEDEL. The
Custodian will provide as soon as practicable after receiving the information
provided by the Fund with respect to the net asset level numbers, a bill for the
Fund, including such reasonable detail in support of each bill as may be
reasonably requested by the Fund. As used in this Appendix "B", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of the
Fund's fiscal year (after receipt of the bill issued to each Fund based
upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a) For each portfolio transaction* processed through a Depository (DTC,
PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through the New York office
(physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and
cash management balances of each Fund at the Custodian to earn the
Custodian's daily repurchase agreement rate less reserve requirements and
FDIC premiums. Negative earnings credits will be charged on all
uncollected custody and cash management balances of each Fund at the
Custodian's prime rate less 150 basis points on each day a negative
balance occurs. Positive and/or negative earnings credits will be
monitored daily for each Fund and the net positive or negative amount for
each Fund
<PAGE>
will be included in the monthly statements. Excess positive credits for
each Fund will be carried forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
<TABLE>
<CAPTION>
Market: Annual Asset Fees Transaction Fees
------- ----------------- ----------------
<S> <C> <C>
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
China .0045 $75
Czech Republic .0055 $135
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Israel .0035 $160
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Phillippines .0035 $95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Taiwan .0035 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
</TABLE>
Note: Fee Schedule eliminates sub-custodian asset and transaction-based
out-of-pocket expenses. Other sub-custodian out-of-pocket expenses (i.e.
Scrip fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
<PAGE>
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
C. Short-term Dollar Denominated Global Assets Eurodollar CDs, Time Deposits:
(1) An annual fee to be computed as of month end and payable each month
of the Fund's fiscal year (after receipt of the bill issued to the
Fund based upon its portion of short-term dollar denominated
assets), at the annual rate of:
.0004 on all short-term dollar denominated assets of the United
Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each month
of the Fund's fiscal year (after receipt of the bill issued to the
Fund based upon its portion of Euroclear issues), at the annual rate
of:
2.5 basis points on all United Funds Euroclear assets held in
account at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
UNITED MUNICIPAL BOND FUND, INC.
AND
UMB BANK, n.a.
Dated as of August 31, 1998
This Subcustodian List relates to the Custodian Agreements between UMB
Bank, n.a. and each of the following funds dated the date specified by the
fund's name, as subsequently amended and restated:
<TABLE>
<CAPTION>
Fund Date
---- ----
<S> <C>
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
Target/United Funds, Inc.*
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Small Cap Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
</TABLE>
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
<PAGE>
<TABLE>
<CAPTION>
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
Country Sub-Custodian Depository
<S> <C> <C>
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, BOVESPA, CLC
Brazil
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni CNB; SCP
Banka A.S.
Denmark Den Danske Bank VP
Finland Merita Securities Association; Finnish Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing Company
India Citibank, N.A., Mumbai National Securities Depository Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
</TABLE>
EX-99.B9-mbssa
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, made as of the 1ST day of November, 1992, by and between
UNITED MUNICIPAL BOND FUND, INC., and Waddell & Reed Services Company (the
"Agent"), as amended and restated as of April 1, 1996,
W I T N E S S E T H :
WHEREAS, The Company wishes, as applicable, to appoint the Agent or to
continue the appointment of the Agent to be its shareholder servicing agent
upon, and subject to, the terms and provisions of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties agree as follows:
1. Appointment of Agent as Shareholder Servicing Agent for the Company;
Acceptance.
(1) The Company hereby appoints the Agent to act as Shareholder
Servicing Agent for the Company upon, and subject to, the terms and
provisions of this Agreement.
(2) The Agent hereby accepts the appointment as Shareholder
Servicing Agent for the Company and agrees to act as such upon, and
subject to, the terms and provisions of this Agreement.
(3) The Agent may appoint an entity or entities approved by the
Company in writing to perform any portion of Agent's duties hereunder (the
"Subagent").
2. Definitions.
(1) In this Agreement -
(a) The term the "Act" means the Investment Company Act of
1940 as amended from time to time;
(b) The term "account" means the shares of the Company
registered on the books of the Company in the name of a shareholder
under a particular account registration number and includes shares
subject to instructions by the shareholder with respect to periodic
redemptions and/or reinvestment in additional shares of any
dividends payable on said shares;
(c) The term "affiliate" of a person shall mean a person
controlling, controlled by, or under common control with that
person;
(d) The term "Class" shall mean each separate sub-class of a
class of shares of the Company, as may now or in the future exist;
<PAGE>
(e) The term "Fund" shall mean each separate class of shares
of the Company, as may now or in the future exist;
(f) The term "officers' instruction" means an instruction
given on behalf of the Company to the Agent and signed on behalf of
the Company by any one or more persons authorized to do so by the
Company's Board of Directors;
(g) The term "prospectus" means the prospectus and Statement
of Additional Information of the applicable Fund or Class from time
to time in effect;
(h) The term "shares" means shares including fractional shares
of capital stock of the Company, whether or not such shares are
evidenced by an outstanding stock certificate issued by the Company;
(i) The term "shareholder" shall mean the owner of record of
shares of the Company;
(j) The term "stock certificate" means a certificate
representing shares in the form then currently in use by the
Company.
3. Duties of the Agent.
The Agent shall perform such duties as shall be set forth in this
paragraph 3 and in accordance with the practice stated in Exhibit A of this
Agreement or any amendment thereof, any or all of which duties may be delegated
to or performed by one or more Subagents pursuant to Paragraph (3) above.
(1) Transfers.
Subject to the provisions of this Agreement the Agent hereby agrees
to perform the following functions as transfer agent for the Company:
(a) Recording the ownership, transfer, exchange and
cancellation of ownership of shares of the Company on the books of
the Company;
(b) Causing the issuance, transfer, exchange and cancellation
of stock certificates;
(c) Establishing and maintaining records of accounts;
(d) Computing and causing to be prepared and mailed or
otherwise delivered to shareholders payment checks and notices of
reinvestment in additional shares of dividends, stock dividends or
stock
<PAGE>
splits declared by the Company on shares and of redemption
proceeds due by the Company on redemption of shares;
(e) Furnishing to shareholders such information as may be
reasonably required by the Company, including appropriate income tax
information;
(f) Addressing and mailing to shareholders prospectuses,
annual and semi-annual reports and proxy materials for shareholder
meetings prepared by or on behalf of the Company;
(g) Replacing allegedly lost, stolen or destroyed stock
certificates in accordance with and subject to procedures and
conditions agreed upon and set out in officers' instructions;
(h) Maintaining such books and records relating to
transactions effected by the Agent pursuant to this Agreement as are
required by the Act, or by rules or regulations thereunder, or by
any other applicable provisions of law, to be maintained by the
Company or its transfer agent with respect to such transactions;
preserving, or causing to be preserved, any such books and records
for such periods as may be required by any such law, rule or
regulation; furnishing the Company such information as to such
transactions and at such time as may be reasonably required by it to
comply with applicable laws and regulations;
(i) Providing such services and carrying out such
responsibilities on behalf of the Company, or imposed on the Agent
as the Company's transfer agent, not otherwise expressly provided
for in this Paragraph 3, as may be required by or be reasonably
necessary to comply with any statute, act, governmental rule,
regulation or directive or court order, including, without
limitation, the requirements imposed by the Tax Equity and Fiscal
Responsibility Act of 1982 and the Income and Dividend Tax
Compliance Act of 1983 relating to the withholding of tax from
distributions to shareholders.
(2) Correspondence.
The Agent agrees to deal with and answer all correspondence from or
on behalf of shareholders relating to its functions under this Agreement.
4. Compensation of the Agent.
The Company agrees to pay the Agent for its services under this Agreement
in accordance with the schedule as then in effect set forth in Exhibit B of this
Agreement or any amendment thereof. In addition, the Company agrees to reimburse
the Agent for the following "out-of-pocket" expenses of the Agent within five
days after receipt of an itemized statement of such expenses, to the extent that
payment of such expenses has not been or is not to be made directly by the
Company: (i) costs of
<PAGE>
stationery, appropriate forms, envelopes, checks, postage, printing (except cost
of printing prospectuses, annual and semi-annual reports and proxy materials)
and mailing charges, including returned mail and proxies, incurred by the Agent
with respect to materials and communications sent to shareholders in carrying
out its duties to the Company under this Agreement; (ii) long distance telephone
costs incurred by the Agent for telephone communications and microfilm and
storage costs for transfer agency records and documents; (iii) costs of all
ancillary and supporting services and related expenses (other than insurance
premiums) reasonably required by and provided to the Agent, other than by its
employees or employees of an affiliate, with respect to functions of the Company
being performed by it in its capacity as Agent hereunder, including legal advice
and representation in litigation to the extent that such payments are permitted
under Paragraph 7 of this Agreement and charges to Agent made by any Subagent;
(iv) costs for special reports or information furnished on request pursuant to
this Agreement and not specifically required by the Agent by Paragraph 3 of this
Agreement; and (v) reasonable costs and expenses incurred by the Agent in
connection with the duties of the Agent described in Paragraph (3)(1)(i). In
addition, the Company agrees to promptly pay over to the Agent any fees or
payment of charges it may receive from a shareholder for services furnished to
the shareholder by the Agent.
Services and operations incident to the sale and distribution of the
Company's shares, including sales communications, confirmations of investments
(not including reinvestment of dividends) and the clearing or collection of
payments will not be for the account or at the expense of the Company under this
Agreement.
5. Right of Company to Inspect Records, etc.
The Company will have the right under this Agreement to perform on site
inspection of records and accounts and to perform audits directly pertaining to
the Company shareholder accounts serviced by the Agent hereunder at the Agent's
or any Subagent's facilities in accordance with reasonable procedures at the
frequency necessary to assure proper administration of the Agreement. The Agent
will cooperate with the Company's auditors or representatives of appropriate
regulatory agencies and furnish all reasonably requested records and data.
6. Insurance.
The Agent now has the insurance coverage described in Exhibit C, attached
hereto, and the Agent will not take any action to eliminate or decrease such
coverage during the term of this Agreement without receiving the approval of the
Fund in advance of any change, except the Agent, after giving reasonable notice
to the Company, may eliminate or decrease any coverage if the premiums for such
coverage are substantially increased.
7. Standard of Care; Indemnification.
<PAGE>
The Agent will at all times exercise due diligence and good faith in
performing its duties hereunder. The Agent will make every reasonable effort and
take all reasonably available measures to assure the adequacy of its personnel
and facilities as well as the accurate performance of all services to be
performed by it hereunder within, at a minimum, the time requirements of any
applicable statutes, rules or regulations or as set forth in the prospectus.
The Agent shall not be responsible for, and the Company agrees to
indemnify the Agent for any losses, damages or expenses (including reasonable
counsel fees and expenses) (i) resulting from any claim, demand, action or suit
not resulting from the Agent's failure to exercise good faith or due diligence
and arising out of or in connection with the Agent's duties on behalf of the
Company hereunder; (ii) for any delay, error or omission by reason of
circumstances beyond its control, including acts of civil or military authority,
national emergencies, labor difficulties (except with respect to the Agent's
employees), fire, mechanical breakdown beyond its control, flood or catastrophe,
acts of God, insurrection, war, riots, or failure beyond its control of
transportation, communication or power supply; or (iii) for any action taken or
omitted to be taken by the Agent in good faith in reliance on (a) the
authenticity of any instrument or communication reasonably believed by it to be
genuine and to have been properly made and signed or endorsed by an appropriate
person, (b) the accuracy of any records or information provided to it by the
Company, (c) any authorization or instruction contained in any officers'
instruction, or (d) with respect to the functions performed for the Company
listed under Paragraph 3(1) of this Agreement, any advice of counsel approved by
the Company who may be internally employed counsel or outside counsel, in either
case for the Company and/or the Agent.
In order for the rights to indemnification to apply, it is understood that
if in any case the Company may be asked to indemnify or hold the Agent harmless,
the Company shall be advised of all pertinent facts concerning the situation in
question, and it is further understood that the Agent will use reasonable care
to identify and notify the Company promptly concerning any situation which
presents or appears likely to present a claim for indemnification against the
Company. The Company shall have the option to defend the Agent against any claim
which may be the subject of this indemnification and, in the event that the
Company so elects, it will so notify the Agent and thereupon the Company shall
take over complete defense of the claim and the Agent shall sustain no further
legal or other expenses in such situation for which the Agent shall seek
indemnification under this paragraph. The Agent will in no case confess any
claim or make any compromise in any case in which the Company will be asked to
indemnify the Agent except with the Company's prior written consent.
8. Term of the Agreement; Taking Effect; Amendments.
<PAGE>
This Agreement shall become effective at the start of business on the date
hereof and shall continue, unless terminated as hereinafter provided, for a
period of one year and from year to year thereafter, provided that such
continuance shall be specifically approved as provided below.
This Agreement shall go into effect, or may be continued, or may be
amended or a new agreement between the Company and the Agent covering the
substance of this Agreement may be entered into only if the terms of this
Agreement, such continuance, the terms of such amendment or the terms of such
new agreement have been approved by the Board of Directors of the Company,
including the vote of a majority of the directors who are not "interested
persons," as defined in the Act, of either party to this Agreement or of Waddell
& Reed Investment Management Company, cast in person at a meeting called for the
purpose of voting on such approval. Such a vote is hereinafter referred to as a
"disinterested director vote."
Any disinterested director vote shall include a determination that (i) the
Agreement, amendment, new agreement or continuance in question is in the best
interests of the Company and its shareholders; (ii) the services to be performed
under the Agreement, the Agreement as amended, new agreement or agreement to be
continued, are services required for the operation of the Company; (iii) the
Agent can provide services the nature and quality of which are at least equal to
those provided by others offering the same or similar services; and (iv) the
fees for such services are fair and reasonable in the light of the usual and
customary charges made by others for services of the same nature and quality.
9. Termination.
(1) This Agreement may be terminated by the Agent at any time
without penalty upon giving the Company 120 days' written notice (which
notice may be waived by the Company) and may be terminated by the Company
at any time without penalty upon giving the Agent sixty (60) days' written
notice (which notice may be waived by the Agent), provided that such
termination by the Company shall be directed or approved by the vote of a
majority of the Board of Directors of the Company in office at the time or
by the vote of the holders of a majority (as defined in or under the Act)
of the outstanding shares of the Company.
(2) On termination, the Agent will deliver to the Company or its
designee all files, documents and records of the Company used, kept or
maintained by the Agent in the performance of its services hereunder,
including such of the Company's records in machine readable form as may be
maintained by the Agent, as well as such summary and/or control data
relating thereto used by or available to the Agent.
(3) In the event of any termination which involves the appointment
of a new shareholder servicing agent, including the Company's acting as
such on its own behalf, the Company shall have the non-exclusive
<PAGE>
right to the use of the data processing programs used by the Agent in
connection with the performance of its duties under this Agreement without
charge.
(4) In addition, on such termination or in preparation therefore, at
the request of the Company and at the Company's expense the Agent shall
provide to the extent that its capabilities then permit such
documentation, personnel and equipment as may be reasonably necessary in
order for a new agent or the Company to fully assume and commence to
perform the agency functions described in this Agreement with a minimum
disruption to the Company's activities.
10. Construction; Governing Law.
The headings used in this Agreement are for convenience only and shall not
be deemed to constitute a part hereof. Whenever the context requires, words
denoting singular shall be read to include the plural. This Agreement and the
rights and obligations of the parties hereunder, shall be construed and
interpreted in accordance with the laws of the State of Kansas, except to the
extent that the laws of the State of Maryland apply with respect to share
transactions.
11. Representations and Warranties of Agent.
Agent represents and warrants that it is a corporation duly organized and
existing and in good standing under the laws of the State of Missouri, that it
is duly qualified to carry on its business in the State of Kansas and wherever
its duties require, that it has the power and authority under laws and by its
Articles of Incorporation and Bylaws to enter into this Shareholder Servicing
Agreement and to perform the services contemplated by this Agreement.
12. Entire Agreement.
This Agreement and the Exhibits annexed hereto constitutes the entire and
complete agreement between the parties hereto relating to the subject matter
hereof, supersedes and merges all prior discussions between the parties hereto,
and may not be modified or amended orally.
IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be
duly executed on the day and year first above written.
UNITED MUNICIPAL BOND FUND, INC.
By:
---------------------------------
Sharon K. Pappas, Vice President
ATTEST:
By:
-----------------------------------
Sheryl Strauss, Assistant Secretary
WADDELL & REED SERVICES COMPANY
By:
----------------------------------
Robert L. Hechler, President
ATTEST:
By:
----------------------------------
Sharon K. Pappas, Secretary
<PAGE>
EXHIBIT A
A. DUTIES IN SHARE TRANSFERS AND REGISTRATION
1. The Agent in carrying out its duties shall follow general commercial
practices and the Rules of the Stock Transfer Association, Inc. except as they
may conflict or be inconsistent with the specific provisions of the Company's
Articles of Incorporation and Bylaws, prospectus, applicable Federal and state
laws and regulations and this Agreement.
2. The Agent shall not require that the signature of the appropriate
person be guaranteed, witnessed or verified in order to effect a redemption,
transfer, exchange or change of address except as may from time to time be
directed by the Company as set forth in an officers' instruction. In the event a
signature guarantee is required by the Company, the Agent shall not inquire as
to the genuineness of the guarantee.
3. The Agent shall not replace a lost, stolen or misplaced stock
certificate without requiring and being furnished with an open penalty surety
bond protecting the Company and the Agent against loss.
B. The practices, procedures and requirements specified in A above may be
modified, altered, varied or supplemented as from time to time may be mutually
agreed upon by the Company and the Agent and evidenced on behalf of the Company
by an officers' instruction. Any such change shall not be deemed to be an
amendment to the Agreement within the meaning of Paragraph 8 of the Agreement.
<PAGE>
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
<PAGE>
EXHIBIT C
<TABLE>
<CAPTION>
Bond or
Name of Bond Policy No. Insurer
- ------------ ---------- -------
<S> <C> <C>
Investment Company 87015198B ICI
Blanket Bond Form Mutual
Insurance
Company
Fidelity $20,400,000
Audit Expense 50,000
On Premises 20,400,000
In Transit 20,400,000
Forgery or Alteration 20,400,000
Securities 20,400,000
Counterfeit Currency 20,400,000
Uncollectible Items of
Deposit 25,000
Phone-Initiated Transactions 500,000
Total Limit 20,400,000
Directors and Officers/ 87015198D ICI
Errors and Omissions Liability Mutual
Insurance Form Insurance
Total Limit $ 5,000,000 Company
Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Aetna
Life &
casualty
Blanket Undertaking Lost Instrument
Waiver of Probate 42SUN339806 Hartford
Casualty
Insurance
</TABLE>
EX-99.B11-mbconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 39 to Registration
Statement No. 2-56969 of our report dated November 6, 1998 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectuses, which also are a part of such Registration
Statement.
Deloitte & Touche LLP
Kansas City, Missouri
November 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000203493
<NAME> UNITED MUNICIPAL BOND FUND, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 882,481
<INVESTMENTS-AT-VALUE> 964,536
<RECEIVABLES> 37,299
<ASSETS-OTHER> 29
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,001,864
<PAYABLE-FOR-SECURITIES> 2,080
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,895
<TOTAL-LIABILITIES> 4,975
<SENIOR-EQUITY> 130,689
<PAID-IN-CAPITAL-COMMON> 772,825
<SHARES-COMMON-STOCK> 130,689
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,427
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,893
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 82,055
<NET-ASSETS> 996,889
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 55,883
<OTHER-INCOME> 0
<EXPENSES-NET> (7,079)
<NET-INVESTMENT-INCOME> 48,804
<REALIZED-GAINS-CURRENT> 16,941
<APPREC-INCREASE-CURRENT> 16,492
<NET-CHANGE-FROM-OPS> 82,237
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (60,752)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 41,024
<NUMBER-OF-SHARES-REDEEMED> (50,160)
<SHARES-REINVESTED> 6,764
<NET-CHANGE-IN-ASSETS> 993,877
<ACCUMULATED-NII-PRIOR> 1,271
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,183
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,079
<AVERAGE-NET-ASSETS> 985,943
<PER-SHARE-NAV-BEGIN> 7.47
<PER-SHARE-NII> .37
<PER-SHARE-GAIN-APPREC> .25
<PER-SHARE-DIVIDEND> (.37)
<PER-SHARE-DISTRIBUTIONS> (.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.63
<EXPENSE-RATIO> .72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
